With the 2017 review of automatic-enrolment approaching, the Pensions and Lifetime Savings Association (PLSA) spent 2016 researching adequacy in pension saving. Together with Hymans Robertson, we used data on pension wealth and other savings to build a picture of what retirement incomes could be for the population of Britain, assuming that automatic-enrolment proceeds as planned. To get an idea of how the future could be different, we also modelled higher contribution rates and later retirement dates.
What we found has real implications for those designing in-house defined contribution (DC) scheme contribution structures. Our initial assumption was that a wide range of demographic factors would drive retirement saving adequacy. In fact, age emerged as the critical demographic factor with others much less important.
Our modelling showed that the millennial generation would be likely to get to a good replacement rate with a 12% DC contribution rate, assuming that they are willing to work longer. We assumed that to be five years beyond state pension age. We also found that about half of the generation closest to retirement were likely to achieve an adequate retirement income mainly due to the presence of defined benefit (DB) arrangements among that population than any difference made by DC saving.
For the middle generation, where defined benefit (DB) entitlement is less common and where DC histories are less developed, the future looks tougher. Contribution structure design will need to take account of a cohort aged between their mid 30s and mid 50s, for whom retirement saving is frequently not on track. While it is going to be hard to alter this trajectory, any additional saving is very likely to be good saving for this cohort. They may not be likely to achieve a replacement rate of two-thirds of median income but higher contribution rates may bring this generation closer to that target.
Tim Gosling is policy lead: DC, at the Pensions and Lifetime Savings Association (PLSA)