Response to the PLSA's Hitting the Target consultation
11 Oct 2017 - Estimated reading time: 1 minute
Commenting on the PLSA's Hitting the Target consultation, Lee Hollingworth, Head of DC Consulting said:
"The PLSA’s research released today showing that 78% of people do not know where to look to see if they're on track with their retirement savings comes as no surprise. Research we’ve just undertaken shows that even more discouragingly, nearly half (40%) of Generation X who are enrolled in a workplace pension scheme simply have no idea that they are in a scheme*. In this generation, that has long been accused of ‘sticking its head in the sand’ about pensions, it appears that many are totally unaware they have been automatically enrolled.
“Our analysis of close to 1 million DC saving plans through our Guided Outcomes platform shows that three quarters of savers are currently off track from an adequate income in retirement. If we don’t wake up to the reality of how far off achieving an adequate income in retirement we are as a nation, we’re never going to solve the savings crisis.
“We desperately need to do two things. First, clearly and compellingly show individuals and their employers how far off track they are from meeting their retirement goals. This can be achieved through setting individuals a replacement rate target then assessing the probability of hitting their goal. Seeing the reality may prompt some to take action. But we need to recognise that many won’t. So secondly we need to build on what has made auto-enrolment a success, inertia.”
Commenting on Hymans Robertson's research findings, and why we need to nudge people to save more, he added:
“In one sense our research proves that the principle of inertia, which underlies auto-enrolment policy, has been a qualified success. A success that will be further tested next April and in 2019 when employee AE contributions hike significantly. This ‘unaware’ 40% might be in for a shock and more disposed to opting out without giving it full consideration.
“If as we expect this doesn’t lead to a significant increase in opt-out rates amongst this demographic is this mission accomplished? Unfortunately not. As a nation we are still massively under-saving for retirement. Auto enrolment has been a commendable start but we need to go further. While efforts to increase engagement are commendable its impact will be limited. What’s required is for the government to commit to the schedule of increasing auto enrolment contribution levels even further. For many to be able to retire on an adequate income, contributions in excess of 15% are needed.
“Of course nobody would expect nor should we aim to reach the 15% figure overnight, in order to reach this figure, we would propose future legislation to introduce a mandatory ‘save more tomorrow’ system. Under this proposed structure, from 2025 a 1% per annum increase - split 0.5% employer and 0.5 employee (including tax-relief) up to a pre-determined date, 2032 for example, would ensure a realistic saving rate. Employees would be able to opt-out at any time in the process back to their pre-increase level, meanwhile future pay rises could offset cost of increase for employee, while the employer would benefit from staff being able to retire at a cost that is phased in very gradually.
* Research undertaken by Hymans Robertson has found that amongst Generation X (those born between 1965 and 1979) only 38% said they had a workplace pension (either DB or DC). Given that that the ONS figures (2016) show that 68% of this generation had workplace pensions it appears that only 60% (38%/68%) of them are aware that they are in a scheme.