Hargreaves Lansdown calls for a more reasonable and realistic approach to measuring pension adequacy, warning current benchmarks risk giving savers “false hope” or “misplaced worry.”
According to its new report, Pension Resilience Benchmarks, published ahead of the next phase of the government’s Pension Review, the lack of a consistent, fit-for-purpose measure of pension adequacy is undermining effective retirement planning. It warns that both over and under-saving can result when benchmarks fail to reflect individual circumstances.
The analysis draws on data from its Savings and Resilience Barometer to compare four pension adequacy measures: the Living Pension, PLSA retirement standards, Target Replacement Rates (TRR), and actual spending among retirees.
Flat ‘pounds and pence’ targets like the Living Pension and PLSA minimums show around 75 per cent of households meeting adequacy, but Hargreaves Lansdown warns they can mislead. These measures overstate progress for higher earners and set unrealistic goals for lower earners. Just 8 per cent of the lowest earners are on track for the PLSA’s moderate income standard, compared to 68 per cent of higher earners.
According to Hargreaves Lansdown, relative benchmarks like TRRs better reflect whether savers can maintain their lifestyle, but reveal many higher earners are falling short.
The report also highlights housing costs as another key factor often overlooked in adequacy metrics. Only the Living Pension and retiree spending benchmarks account for rent or mortgage costs in retirement. Just 15 per cent of renters are on track for a moderate retirement, compared to 47 per cent of homeowners.
Hargreaves Lansdown recommends that the government adopt realistic, consistent adequacy targets, centred on TRR with a Living Pension floor, and introduce new incentives for voluntary contributions, especially for at-risk groups.
Hargreaves Lansdown head of retirement analysis Helen Morrissey says: “Are we saving enough for retirement? If not, why not and what can we do about it? The answer depends on having a reasonable view on what adequacy looks like. Without it, we risk groups of people continuing to undersave and potentially receiving a nasty shock when they come to retire. Others could strive to hit a target that’s far too high, causing themselves unnecessary financial stress and potentially turning them off pension saving altogether. We need to define what those targets look like.
“It’s a vital issue at the very core of long-term saving success. The government’s upcoming assessment of pension adequacy will form the basis of its long-term thinking around pensions. The future direction of auto-enrolment and the state pension needs to be based on a firm foundation of the reality for retirees today.
“Right now, there isn’t a common approach, and people are left in the dark about what they need to save. Using the wrong measure could give people either the false hope they are saving enough or the misplaced worry that they’ve fallen way behind.”
