Out-Law News 3 min. read
23 Oct 2013, 8:02 am
Research by the Pensions Policy Institute (PPI) (64-page / 1.1MB PDF) found a 63% probability of a lower earner achieving an adequate retirement income on minimum contributions, compared to 49% for 'median' earners and 40% for the highest earning workers. The PPI defined 'adequate retirement income' as two thirds of an individual's income in employment, and based its findings on someone who begins saving at 22 and retires at the state pension age.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the report provided "detailed evidence of what many in the pensions industry had already been claiming".
"Minimum contributions under auto-enrolment are unlikely to provide an adequate replacement income on retirement for anyone except lower earners," he said. "Lower earners don't do so badly since the state pension provides a larger proportion of their retirement income. But even for them, a decent replacement income on retirement depends on future governments retaining the 'triple lock' on state pension increases."
"Now that we have the evidence, politicians and lobby groups need to get to grips with the policy implications - and this isn't so easy. If minimum contributions are raised, more workers may opt out, leaving them worse off. But members and their employers may struggle to afford larger contributions if compelled to pay up. The arguments are likely to run for some time," he said.
Auto-enrolment began for the largest employers on 1 October 2012, and 'staging dates' by which smaller companies and new companies will have to begin the process run until 2018. Eligible workers will have to be automatically enrolled into a pension scheme which meets minimum requirements, or the Government-backed National Employment Savings Trust (NEST), and employers will be legally obliged to make contributions towards the pensions of those who do not opt out of the scheme.
Pension contributions by both employers and employees under automatic enrolment will be phased in, rising to a minimum total contribution of 8% of earnings by October 2018. Of this, a minimum of 3% will have to be contributed by the employer. The current minimum contribution is 2%.
The PPI based its figures on contributions at 8% of high, average and low earnings. It calculated the probability of each of these profiles achieving an adequate retirement income provided that they started saving at 22, retired at the state pension age and followed a traditional lifestyle investment approach. The result of being automatically enrolled into a defined contribution workplace pension was "highly uncertain", with individuals generally needing to contribute "more than the minimum level at which they are likely to be automatically enrolled" to have a "good chance" of reaching the targets, PPI director Chris Curry said.
"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," he said.
"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," he said.
The PPI also warned that the likelihood of lower earners meeting the targets was tied to what happened to the state pension under upcoming reforms. The new single-tier state pension is due to be introduced from April 2017, at which time pension credits, means testing and the second state pension will be abolished.
"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%," Curry said.
Under an earnings-linked state pension increase scenario, the probability of a lower earner achieving an adequate retirement income would drop from 63% to 36%; while the chances of median and higher earners meeting the targets would fall to 30% and 28% respectively, according to the research.