The Resolution Foundation has called for a the creation of a ‘living pension’ to help savers understand what they need for an adequate standard of living in retirement.
The concept is modelled on the the living wage, which estimates a minimum salary needed to cover basic living costs.
In its report — co-authored with Aviva — the Resolution Foundation sets out a framework to calculate a ‘living pension’, identifying the contributions needed from both employers and employees to ensure an adequate income in retirement.
The report pointed out that this was more complex than the sums needed to calculate a living wage, partly because a pension may have to support a whole family. Geographic location, housing costs and family circumstances will also lead to very different income requirements.
Resolution calculates that a single homeowner pensioner would require an income of just £200 a week, while the average couple who rent would need £450 a week.
It added that across all cohorts the average pension pot would need to be £70,000 to produce an adequate income in retirement for low- to middle-income employees.
This report has been welcomed by the pension industry. The PLSA’s director of policy and advocacy Nigel Peaple says: “We are very pleased to see the Resolution Foundation and Aviva, joining us to highlight that people are not saving enough for retirement. We hope the Government and savers take note to help ensure everyone achieves an adequate income in retirement.
“The Resolution Foundation’s proposal identifies a target level of income in retirement which, like the PLSA’s Retirement Living Standards, is based on the basket of goods methodology used in the minimum income standard.”
He points out there are two main differences between the calculations: the living pension includes the cost of paying rent in retirement as the Resolution Foundation estimates that in the future about half of those on middle to low incomes – the focus of the Resolution Foundation’s work – are likely to have to meet this cost.
The other key difference is that the Resolution Foundation focuses on one level, a minimum, whereas the Retirement Living Standards also provide two higher levels of lifestyle.
He adds: “The ‘living pension’ analysis estimates that someone in their 20s on average earnings of £25,000 per year will need to increase their pension savings from the current automatic enrolment rate of 8 per cent of a specified earnings band to a little over 11 per cent of all earnings. This aligns with the PLSA’s proposals, announced in 2018, for automatic enrolment contributions to be increased to 12 per cent in the late 2020s with the transition completed by 2030.”
Canada Life technical director Andrew Tully adds: “Auto-enrolment means millions more people are saving for their retirement. The next challenge is to help these people engage more with their pensions to plan for their later life and the kind of retirement they want.
“Anything which helps people understand how much income they are likely to need in retirement will be very useful. Many are in the dark around how much to save and what size of pension pot they need. This may help them picture their future retirement and what it may cost to meet those aspirations.”
Phil Brown, director of policy at The People’s Pension, adds: “Setting out the minimum income needed for a decent retirement will simplify pensions for everyone. The challenge for the pensions industry is to ensure that people understand clearly how much they need to save to reach that minimum standard.”
The PLSA confirmed that it would updated the three levels of the Retirement Living Standards – Minimum (£10k), Moderate (£20k), and Comfortable (£30k) — later this year.
Peaple says: “This will provide some very interesting post pandemic findings. Currently, over 40 pension providers, including Legal & General and The People’s Pension; and workplace pension schemes operated for employees at companies like M&S and Tesco, are using the Retirement Living Standards. We estimate they are reaching over 14 million savers.”