Future retirees are unlikely to have saved enough to achieve both an adequate and sustainable retirement income without policy change, the Pensions Policy Institute has said, publishing new research on Tuesday. 

 

In the ninth edition of its DC Future Book, the PPI found that someone currently aged 22, contributing 8% of median earnings through working life – the minimum auto-enrolment level – could meet the Pensions and Lifetime Savings Association’s ‘moderate’ Retirement Living Standard for about 12 years - half of the average retirement – or the ‘comfortable’ living standard for a mere four years. 

 

This unenviable choice leaves people either dropping off a steep income cliff in retirement or having a consistently low living standard.  

 

The PPI notes that the risk faced by future retirees is compounded by demographic, economic and policy changes that mean they will need higher saving levels to achieve similar living standards to current retirees. For example, longer life expectancies mean that savings will have to be spread across a longer retirement period, unless working lives can be extended. At the same time, future retirees are more likely to still be paying rent as levels of home ownership are falling.  

 

Most young savers are not on track to achieve positive retirement outcomes, unless they make significant changes to their saving behaviour or there is a change in policy, said senior policy researcher Lauren Wilkinson, observing that an increase in employee contributions will be challenging for many because of the cost-of-living crisis. 

 

Wilkinson suggests this could be addressed by increasing the level of the state pension, making changes to tax relief or raising minimum employer contribution levels, currently at just 3%, though she admits these would come at a cost to taxpayers or employers. 

 

Seismic changes in pensions over recent decades have left savers with little support – something Wilkinson says may need to change. 

 

"Nevertheless, 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 [defined benefit] 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,” she argued. 

 

 

Andrew Brown, institutional business director at Columbia Threadneedle Investments, which sponsored the research, said current economic uncertainty and rising inflation have brought extraordinary challenges, but that the effect of these on future living standards in retirement has not been well documented. 

 

“The inadequacy of retirement provision is fast becoming one of the UK’s biggest socio-economic challenges,” he noted.  

 

Whether a minimum, moderate or comfortable retirement becomes the norm is “largely contingent on timely and decisive action or continued inaction by both the pensions industry and policymakers”, Chris Wagstaff, head of pensions and investment education at Columbia Threadneedle and senior visiting fellow at Bayes Business School, wrote in the report. 

 

“Indeed, the economic and societal risks that may result from continued inaction could be significant, if not catastrophic. The clock is ticking,” Wagstaff said. 

 

Stuart McDonald, head of longevity and demographic insights at consultancy LCP, stressed that rising life expectancies mean pensions will need to stretch further than before.  

 

“DC scheme members need to be mindful of their planning and financial capability in later life or they may face the risk of financial strain in retirement. Empowering individuals with the tools, education, and support needed to navigate these uncharted waters is essential,” he said. 

 

McDonald called for “collaborative efforts between the government, employers, and financial institutions” to find ways to support future retirees. 
 

Are employers sharing enough of the risk under auto-enrolment?

Chris Wagstaff

Stuart McDonald

George Currie