Low levels of home ownership, increased life expectancy and relatively low AE contributions mean today’s younger workers will face stark choices in retirement, according to latest report from the Pensions Policy Institute on the future of DC savings.
It says even with planned AE reforms, younger workers are unlikely to accrue sufficient savings to ensure a comfortable lifestyle throughout their retirement. Many will have to choose between a few well-funded years, or an income that lasts for longer buy pays less.
The PPI’s DC Future Book, complied in association with Columbia Threadneedle Investments, focuses on the specific problems facing younger workers and concludes demographic, economic and policy changes mean they will need higher savings levels to achieve similar living standards to current retirees.
The report says that longer life expectancies mean that savings will have to be spread across a longer retirement period, unless working lives can be extended, while lower levels of home ownership are likely to lead to higher housing costs in retirement for future generations.
The report says that someone currently aged 22, contributing 8 per cent of median earnings through working life, could meet the PLSA’s moderate Retirement Living Standard (RLS) for 12 years —around half of retirement on average, or they have the option of the comfortable RLS for just 4 years. This means that future pensioners may have to choose between adequacy for a short time or a more sustainable income, that pays out for more years but at a lower level.
PPI senior policy researcher Lauren Wilkinson says: “Young savers have seen the greatest uplift in pension participation rates as a result of automatic enrolment. However, even with this most young savers are not on track to achieve positive retirement outcomes without policy change unless they make significant changes to their saving behaviour.
“In the current economic climate, increasing individual contribution rates will be challenging for many savers. However other policy options exist, such as increasing the level of the state pension, so reducing the amount people need to save into private pensions), changes to tax relief, or raising minimum employer contribution levels.”
She adds there are trade-offs associated with these potential policy options, not least the cost to Government or employers. But she adds: “Young people are saving within a very different pensions landscape compared to previous generations, with greater individual exposure to risks and significantly lower employer contributions than seen in DB and pre-automatic enrolment DC schemes. Increased participation alone is not enough to deliver positive retirement outcomes, and they will require more support to achieve these.”
Columbia Threadneedle Investments institutional business director Andrew Brown adds: “The last 12 months have revealed the extraordinary challenges brought on by current economic uncertainty and rising inflation. Whilst the consequences of the current climate on present living standards have been well documented, less emphasis has been placed on how today’s cost of living crisis will affect future retirees.
“The inadequacy of retirement provision is fast becoming one of the UK’s biggest socio-economic challenges. I expect The Extension of Auto Enrolment (Pensions Bill), which will remove the lower earnings limit and reduce the age for automatic enrolment, to positively impact savings and member eligibility. Together with the Mansion House Reforms and Value For Money framework, a focus on diversifying investment strategies and shifting away from a low-cost mindset may further improve member outcomes.”
