Four in five workers undersave – do we need higher AE contributions?
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About 16m workers are not meeting any of the living pensions benchmarks by the Living Wage Foundation to achieve an acceptable standard of living, a new report has found. Is this strengthening the case for higher auto-enrolment contributions?
A new report on pensions adequacy, published on Thursday by the Resolution Foundation together with campaign group the Living Wage Foundation and the abrdn Financial Fairness Trust, analyses how many workers are on track to achieve a Living Pension. The report defines a sufficient pension as a ‘whole career’ savings rate of 11.2% or £2,100 a year, which apply if workers start saving in their 20s, or an ‘all age’ benchmark of 16.1% of salary or £3,000 a year to account for those who started saving later. According to these measures, outside of DB members, more than 80% are not meeting any of the savings benchmarks.
Would a Living Pension standard improve adequacy?
Last year, thinktank the Resolution Foundation looked at the feasibility of creating a Living Pension benchmark – modelled on the UK’s Living Wage – to improve pension outcomes. The organisation assessed the level of income that would be needed in retirement to meet the real cost of living, which was used to calculate an annual savings target based on age.
Katherine Chapman, director of the Living Wage Foundation, said the latest figures show many are headed for pensions poverty, exacerbated by the current cost-of-living crisis, and championed a Living Pension standard. mallowstreet understands this will be launched early next year.
Developing a Living Pension standard will build on the Living Wage created by the foundation, she said, to not only encourage employers to offer more than the auto-enrolment minimum but also provide a benchmark to measure against.
“By making this accessible and simple, we aim to bring greater transparency, understanding and confidence to pensions, and build on the work of the Living Wage, by providing security and stability for workers now and in the future,” said Chapman.
Mubin Haq, chief executive of the abrdn Financial Fairness Trust, said the amounts saved in defined contribution schemes fall far short of what is needed. "Unless we take action now, we are on course to wipe out many of the gains we have seen in reducing pensioner poverty. A living pension provides employers with a model to do the right thing and ensure their staff are not facing hardship in the future.”
Just 1% of low-paid save enough
In 2018-20, 85% of all workers without a DB pension, about 16m, were saving at or below the ‘whole career’ percentage benchmark, and 91% were saving below the ‘all age’ benchmark. For a typical worker earning a median salary of £26,000 and saving 6%, this translates to a shortfall of at least £1,300 a year in pensions saving.
The lower-paid are worst affected, as just 1% of workers with hourly pay in the bottom fifth of the distribution meet the 11.2% benchmark, compared with 65% in the top fifth of the hourly pay distribution.
According to the findings, those in elementary occupations – which include cleaning and agriculture – are least likely to meet any of the benchmarks. Managers and senior professionals are 12 times more likely to meet or exceed the ‘whole career’ cash living pension benchmark compared with workers in elementary occupations. All groups were less likely to meet the ‘all age’ benchmark than the ‘whole career’ benchmark.
Workers in elementary occupations are the least likely to meet the living pensions benchmarks
Source: Resolution Foundation
Men are more likely than women to have pension saving rates above the living pensions benchmarks, with 23% of male workers meeting the ‘whole career’ cash benchmark compared with 15% of female workers, the research found. This seems to be an effect of the persistent suppression of women’s incomes, also described as a gender pay gap; when accounting for pay, women are more likely to meet the living pension benchmarks, the analysis shows.
The report also pointed out that 35% of workers are still not saving towards a pension at all.
Do the figures strengthen the case for 12% minimum contributions?
Automatic enrolment, rolled out between 2012 and 2019, means millions more are now saving for a pension than before its introduction, but there is mounting concern over the low minimum contribution levels, set at just 3% for employers and 5% for employees. Meanwhile, promised reforms that would extend coverage to 18 to 21-year-olds and ensure contributions are calculated on the first pound earned are yet to be introduced by government.
The Pensions and Lifetime Savings Association and the Association of British Insurers, representing trust and contract-based schemes respectively, have separately called for bringing minimum contributions to 6% for employers and 6% for employees. Pensions minister Guy Opperman has publicly said he believes combined contributions should rise to 12% but was reluctant to commit to an equal split between employers and employees.
However, some believe that making low-paid workers save for a private pension could mean they oversave in terms of income replacement, as the state pension provides a basic level of income, currently at about £9,600 a year. Higher auto-enrolment contributions could therefore make the lower-paid to unnecessarily reduce their standard of living during working life.
