Retirement income - will it be adequate? by Chris Curry, Director, Pensions Policy Institute on 22-Oct-2013

The Pensions Policy Institute (PPI) has just published What level of pension contribution is needed to obtain an adequate retirement income?, a report that analyses the effect that contribution rates to workplace pensions could have on overall levels of retirement income.

The report finds that if a median earner saves only at the minimum contribution rate of 8% of a band of earnings throughout their working life, they will have a less than fifty-fifty chance of achieving an adequate retirement income.

"The analysis shows that the outcomes from being automatically enrolled into a defined contribution workplace pension are highly uncertain," said Chris Curry, PPI Director. "In general, individuals will need to contribute more than the minimum level at which they are likely to be automatically enrolled to have a good chance of achieving an adequate retirement income."

"For example, a median earner who starts saving at age 22 and contributes continuously until reaching State Pension Age will need a total contribution from employee, employer and Government of 11% of band earnings to have a two in three chance of receiving an adequate retirement income."

"However, there is not a single contribution rate that will mean that everyone will have an adequate retirement income. Lower earners may be able to contribute less than the hypothetical median earner, as a greater proportion of their income is provided by the state. But higher earners, those who opt-out early in their career and individuals with career breaks need to contribute more than the median earner to have a two in three chance of achieving an adequate income in retirement."

"What happens to the single-tier state pension has a significant impact on the chances of achieving an adequate retirement income," continues Chris. "If the single-tier pension is increased each year in line with average earnings growth – the minimum level set out in the current Pensions Bill – rather than the 'triple lock' of the higher of earnings, prices and 2.5% that the DWP has used in illustrations, the contribution needed by the median earner to have a two in three chance of an adequate retirement income is 14% of band earnings, rather than 11%."

The Government could consider a number of strategies to increase pension saving. The Government could encourage or enable the provision of information and advice to individuals, or they could provide better incentives for pension saving, so that individuals choose to save more.

However, automatic enrolment was introduced because the system of incentives to save and advice has not worked well in the past. There is also evidence that the system of incentives to save is poorly understood.

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