Five steps to better pensions: time for a new consensus

FIVE STEPS TO BETTER PENSIONS: TIME FOR A NEW CONSENSUS

FOR A

CONTENTS

FOREWARD

SUMMARY

AND BACKGROUND

MANY ARE UNDER PENSIONED

POTENTIAL SOURCES OF WEALTH

THE MOST UNDER PENSIONED GROUPS

AUTOMATIC ENROLMENT (AE) 2017 REVIEW FINDINGS – GOVERNMENT COMMITMENT

OUR ASSESSMENT OF THE DRIVERS OF UNDER SAVING

NEED TO EMPOWER FUTURE RETIREES BY AGREEING NOW ON THE FUTURE OF THE UK

PENSION FRAMEWORK

SETTING ADEQUATE, AFFORDABLE AND FAIR GOALS FOR PENSIONS ADEQUACY

ACHIEVING A RETIREMENT INCOME FOR ALL THAT IS ABOVE AN ACCEPTABLE DEFINITION OF POVERTY

GETTING MORE PEOPLE TO SAVE MORE INTO WORKPLACE PENSIONS

HELP LOW INCOME OR OTHERWISE UNDERPENSIONED GROUPS WITH ADDITIONAL MEASURES

AFFORDABILITY ACROSS A LIFETIME OF BOTH PENSION SAVING AND RETIREMENT

INDUSTRY IS ALREADY ENCOURAGING SAVER ENGAGEMENT AND ADEQUATE CONTRIBUTIONS

ENGAGEMENT INITIATIVES

ENHANCED CONTRIBUTIONS

EFFICIENT PRODUCTS AND SOLUTIONS

HOW FAR CAN INDUSTRY INITIATIVES GO?

FOR CONSENSUS

IS ALREADY AGREEMENT THAT CHANGES TO AE ARE NEEDED

ISSUES OUTSIDE OF PENSIONS THAT MUST BE OVERCOME

CONCLUSION, WE’RE WORKING TO BUILD A NEW CONSENSUS FOR A FUTURE FRAMEWORK

OF OUR RECOMMENDATIONS

FOREWORD

THERE IS A PENSIONS ADEQUACY CRISIS OVER THE HORIZON. MILLIONS OF PEOPLE FACE RETIRING WITH AN INCOME FAR BELOW THE LEVEL THEY HAVE DURING WORKING LIFE. IT WILL NOT COME UPON US QUICKLY BUT CREEP UP SLOWLY AS THE CURRENT WORKING POPULATION REACHES THEIR LATER LIFE.

Over 50% of the population will fail to meet the retirement income targets set by the 2005 Pensions Commission. Of those households currently saving into a DC pension our research finds that 62% will not achieve their target.

To say that times are tough now is an understatement. For this reason, we are not recommending that anyone save more money now towards a pension during the current cost of living crisis, unless they can afford to. But sadly, these problems are not going away. We believe we need a roadmap to put the UK on a different route, to avoid sleepwalking into a pensions adequacy crisis.

Even under our reforms Generation X and older Millennials without Defined Benefit provision will struggle to improve their financial outlook in retirement as they have fewer working years left. While every pound of pension saving will help enhance the retirement income of these generations, they will also need to use housing wealth, if they have it, or work extra years, if they can.

Our proposed reforms will be very effective for younger workers, and for those who have not yet joined the workforce. This is due to the need to ensure the changes are both affordable and gradually implemented over 10 to 15 years. Our proposals would increase projected retirement income for median earners by approximately 25%, and half median earners by 20%.

We need to quickly build a consensus on how the UK should reform the pension system. Our ‘Five Steps to Better Pensions’ sets out a roadmap for reform. We appreciate that it is difficult to look up over the horizon, especially given what we know about how much people struggle to be interested in long-term saving when they are suffering short-term hardship. Employees are not alone; their employers are also struggling and may do for some time.

However, there are grave costs to all of us by further delaying planning; today’s cost of living crisis can easily turn into tomorrow’s cost of retirement crisis.

Our roadmap aims to balance the need to prevent millions of future retirees having inadequate incomes in the coming decades, whilst recognising the current cost of living crisis.

I would like to thank all that have participated in our work to get us to this stage. Many issues included in this report are complex and multifaceted and have required patient attention.

Our work here is far from done, and I warmly invite you to engage with us during our consultation on approaches to resolving pensions inadequacy, launched by this document, and share your evidence, ideas, challenges and support with generosity. This is a once in a generation opportunity for all stakeholders to come together and build consensus and find solutions. Working together we believe can take significant steps to make sure that everyone achieves a good income in retirement.

EMMA DOUGLAS, PLSA CHAIR

REPORT ON A PAGE

The story so far on automatic enrolment (AE) has been positive, with more people saving than ever before. There is widespread support for the policy. The context for encouraging pension saving is currently highly challenging, with a need to be sensitive to very real affordability concerns.

We find that too many people are projected to have inadequate incomes in retirement, with many missing both their Pensions Commission Replacement Rate, and Retirement Living Standards.

We have undertaken new research to analyse the retirement outlook for the whole population, including representative examples, and under pensioned groups.

We make five recommendations for reform:

1) National objectives: The creation of clear national objectives for the UK pension system - ‘adequate, affordable and fair’ objectives - combined with regular formal monitoring of whether it is on track to achieve these goals;

2) State pension: Reform of the state pension so that everyone achieves the Minimum Retirement Living Standard, to prevent pensioner poverty;

3) AE reform: Reform AE to get more people saving (such as younger people, multiple job holders and gig economy workers) and at higher contributions (by removing band earnings and gradually increasing contributions from 8% to 12%, split evenly between employers and employees). This is so that people on median earnings are more likely to achieve the Pensions Commission’s Target Replacement Rates;

4) Under pensioned groups: Additional policy interventions to help under pensioned groups (including women, gig economy workers, self-employed people and others), and;

5) Industry initiatives to achieve better pensions: Actions to help people engage with pensions, receive higher contributions, or get better pension outcomes.

We have modelled the impact of our proposals and find that they help many people achieve a better income in retirement. For a median earner their projected retirement income would increase from £15,347 to £19,181 for men and from £14,927 to £18,516 for women. This amounts to men increasing their retirement income by 25% (£3,834) and women by 24% (£3,589). The industry is already encouraging saver engagement and adequate contributions, though further work may be needed to gather more evidence and refine interventions to benefit all savers.

There is already agreement that an evolution of AE is needed, and we’re launching this report to build a new consensus to deliver a pensions framework fit for the future. Now is the right time to set a roadmap for future reforms.

1

EXECUTIVE SUMMARY

THE STORY SO FAR ON AUTOMATIC ENROLMENT (AE) HAS BEEN POSITIVE

1. In the 10 years since AE was introduced the unprecedented success of this policy in increasing the number of people saving for retirement has become clear. Every year the number of people saving for a pension has increased. 19.4 million savers are now participating in a workplace pension; that’s approximately 40 percentage points more than before the introduction of AE.1

2. Moreover, continued support for the policy is widespread and extends beyond savers, consumer champions and the private pensions industry; proponents include policy makers and employers.

3. Opt-out rates remain lower than expected when the policy was originally introduced, and evidence suggests that people highly value pension savings and will continue to save in large numbers despite significant economic shocks, including the Covid-19 pandemic.

THE CONTEXT IS HIGHLY CHALLENGING

4. In August 2022 the Bank of England projected that inflation could peak at around 13%, before steadily falling in 2023, and potentially return to the target of 2% within two years. This costof-living crisis, the worst for many decades, will place short term and immediate needs into sharp focus for most households. We are not calling for the immediate implementation of any proposals, and our plans for the gradual evolution of AE won’t begin for several years.

5. Discussing and building consensus for a plan for affordable future reform of pension saving –an inherently long-term consideration – must strike a balance between protecting disposable incomes in the present, and retirement income adequacy in the future. Therefore, none of our proposals involve raising contributions over the next three years, and most changes would occur more slowly over the course of the next decade or longer.

BETTER

TOWARDS RESILIENCE

FIND THAT TOO MANY PEOPLE ARE FALLING SHORT

6. This report and accompanying research provides fresh evidence about the levels of pensions inadequacy across the UK. In this report and in our research we use two measures - one absolute measure which is our Retirement Living Standards and one contingent or relative measure which is the Pensions Commission Replacement Rate.

7. Whether measured on an individual or household basis, few are currently on track to hit the ‘benchmark’ Pensions Commission Replacement Rate.2 The Pensions Commission proposed that the UK system should aim to support someone on median earnings to achieve a combined state pension and workplace pension of between 60% and 70% of their pre-retirement income, with a higher rate for people on lower earnings, and a lower rate for someone on higher earnings. Of the working population who are currently saving into a pension (approximately 14.5 million households), 59% of households will not achieve their Pensions Commission’s target replacement rates; that’s nearly 6 million households currently saving for a pension who face a substantial drop in income when they come to retire.3 Due to the lower value of contributions involved, the situation is even worse for people are currently saving into a defined contribution (DC) pension (approximately 5.5 million households). Here 62% of DC saving households will not achieve their

Rate.4

Total Population

Total Population

Population

DC Population

Population Active DC Population

8. Measuring against the Retirement Living Standards5, most are on track to meet the Minimum level (with some groups at higher risk of being under pensioned such as women, part-time workers, multiple job holders and the self-employed), but we find nearly 20% of households are currently projected to fall below this level and face poverty in retirement. Replacement rate methodologies may disguise the inadequacy of outcomes for lower earners and those with interrupted or incomplete work histories, as although they are more likely to reach their Pensions Commission Replacement Rate due to the State Pension, they are at greater risk of not reaching the Minimum Retirement Living Standard compared with the rest of the population6. Only 28% of households (4.8 million households) are on track to hit the Moderate Retirement Living Standard, and only 8% of households (1.4 million households) are on track to hit the Comfortable Retirement Living Standard.

9. Taking the example illustration of a current 22-year-old, who is automatically enrolled into a pension for a full working life under the present system, there is still a mixed picture on whether they will achieve their Pensions Commission Replacement Rate. For median earners with a full working life in the current system, their projected retirement income is £15,347 for men and £14,927 for women, equating to Pensions Commission Replacement Rate of 57% for men and 52% for women, which is considerably below the target of 70% for males and 67% for females.7

Figure

achieve Pensions Commission Replacement Rate

Figure two: Current projected retirement replacement rate of income shown against the Pensions Commission Replacement Rate target

CURRENT SITUATION

TARGET REPLACEMENT RATE

Twice median female 30% 60%

Twice median male 32% 60%

Median female 52% 67%

Median male 57% 70%

Half median female 92% 80%

Half median male 100% 80%

Key: Red denotes savers are not projected to achieve their PCRR, Green denotes savers are projected to achieve their PCRR after our proposals, Purple denotes savers are expected to exceed their PCRR, Amber denotes savers are within proximity of their target PCRR but are not expected to hit it.

10. Even when we take account of other potential incomes in retirement – such as property wealth, working longer, inheritance and other financial wealth – we find that a significant proportion of the population is likely to face an inadequate pension income. The risks are particularly high for lower and median earners as, even where they have other assets, these are likely to be lower in value and less readily converted to income. On average, property wealth is not going to help the majority of people have an adequate retirement income. This is because the median property wealth for the just over 60% of people who own a home is only £57,700 per household, and only the top 20% of households have property wealth of more than £100k on average.8

11. The picture is mixed for those who earn a lower income throughout their working life, as many may be at risk of ‘over-saving’ and becoming ‘over-pensioned’. Using Replacement Rate methodologies, the people at greatest risk of being ‘over-pensioned’ are those for whom the State Pension represents a high, complete or more than 100% replacement of in-work income. There will be people for whom this will be the case even when the State Pension alone does not avoid poverty in retirement. This is one reason why we also assess adequacy using Retirement Living Standards as these take account of a reasonable living standard in retirement, regardless of previous in-work income.

12. We have also explored the available evidence for under pensioned groups, including women, ethnic minorities, those that work in different patterns such as multiple job holders, part time workers, gig economy workers and the self-employed. We find that for some the outlook is poor unless the pensions framework is evolved and future proofed for the modern economy, where increasingly diverse working patterns are the norm.

13. We are not alone in identifying concerning trends that are unlikely to be resolved without further action as others, including consumer representatives, business representatives and the Government, have identified the need to improve AE. We believe that reform is needed and should

8 https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/ totalwealthingreatbritain/april2018tomarch2020

be designed specifically to enhance the successes of AE, target shortfalls for under-pensioned groups, and future proof the pensions system for the retirees of tomorrow. In September 2022 the Work and Pensions Committee Protecting pension savers - five years on from the pension freedoms: saving for later life reported on the third session 2022-23, the findings and recommendations from which are consistent with this report.

14. It will be particularly important to tackle projected inadequacy for the generation of savers who will be dependent on DC saving in the future; fifteen times more people are currently saving into a DC private sector pension than DB private sector pension.9

WE NEED TO EMPOWER FUTURE WORKERS BY AGREEING NOW ON THE FUTURE FRAMEWORK

15. The only ongoing mechanism to monitor retirement income is regular review of the State Pension age. But this is just one component of retirement income. The UK framework has no clear adequacy objective, nor ongoing measuring and monitoring against this. It is therefore no surprise that so many people fall short of the retirement income goals set by the Pensions Commission. We, therefore, need a goal, and regular monitoring of progress towards it, which considers not just the state pension, but private pension entitlements and other assets.

16. We have systematically reviewed and assessed the current pensions framework and find five key elements of reform are needed to begin to future proof it. Our research shows that if we begin to plan now, and set out a roadmap for reforms, over the next 10 to 15 years a new framework could be implemented to substantially improve the prospects of the majority of savers. For a median earner their projected retirement income would increase by approximately 25% (£3,834) and women by 24% (£3,589), and half median earners would see increases of approximately 20% (£2,878 for men and £2,755 for women).

17. To empower future workers, and provide them with sufficient income to achieve a dignified standard of living and avoid poverty, we need to take the following steps to continue the work of the Pensions Commission:

18. We believe the UK pensions system should be set an objective to be adequate, affordable and fair.

An adequacy objective

19. It is important that the state pension ensures, at a macro level, that no one is at risk of poverty in retirement. The definition of poverty used is set at a point clearly above the “destitution” level (currently approximately £8k a year) but below the relative poverty level (60% of median earnings, or currently approximately £20k a year).10 We argue this level should be equivalent to the Minimum Retirement Living Standard for each individual, currently equivalent to £10,900 per annum. The new State Pension, at £9,628 per year, is currently approximately 15% short of our proposed new poverty avoiding level.11 Meeting this measure will entail gradually increasing costs but these are, perhaps, the cost of an ageing society. It is also the case that current mechanisms such as the Triple Lock, which we support, will gradually reach this higher level if retained for a number of years.

20. It is right in principle to ensure that the state pension protects against poverty and allows people to fully take part in society, albeit at a modest level of income. The current State Pension goes a long way to achieve this, but we think it needs to go further.

21. Adequate pensions mean more than just having a minimum lifestyle. As the Pensions Commission found, most people do not want to experience a major drop in income after they finish working. Therefore, we believe many need to be saving in a workplace pension at a higher level so as to help them get closer to maintaining their pre-retirement lifestyle. We propose increasing automatic enrolment saving from 8% of AE band earnings to 12% of salary.

An affordability objective

22. Increasing contributions gradually, and in a manner that is sensitive to current and future affordability concerns for both individuals and businesses, to reach 12% by the early 2030s will help make extra saving affordable. First, the employer contribution should gradually increase from 3% to 5% to match that of the employee, with contributions reaching 10%, and then both the employer and employee contributions should increase by a further 1% to reach 12% over time. Increasing minimum contributions is the single most effective reform to get more people on the right track. State Pension increases will also significantly improve retirement outcomes even for those that would otherwise be unable to afford increased in-work saving, for example those with caring responsibilities and the under pensioned. The framework must at the same time protect those on lower incomes from inadvertently over-saving.

A fairness objective

23. Early in this timeframe we would like to see the Government implement its planned increases to the scope and eligibility for AE through the removal of the Lower Earnings Limit and the reduction in qualifying age from 22 to 18, both of which will be a significant help to under pensioned groups, including women. Increases to the State Pension is one of the fairest means to address retirement inadequacy across the population, regardless of their work history, caring responsibilities or income. Further, as above, our approach to increasing minimum contributions over time is intended to result in both employees and employers contributing on a 50/50 basis.

10 Measures of poverty referred to here reflect inflationary effects either directly as a result of independent assessment and adjustment or as a function of increases to earnings.

11 This is before inflation adjustment to the Retirement Living Standard Minimum level, expected to be significant in 2022.

24. In addition, we have also considered targeted approaches for specific under pensioned groups, such as women, ethnic minorities, carers, part-time workers, self-employed people, gig economy workers and lower earners in general. Our initial suggestions to address inequalities vary by the group concerned; those range from family carer top ups, further guidance and support and new nudges, alongside widening the scope and level of AE. We also propose more work to better understand evidence of and approaches to tackling issues for under pensioned groups, such as for ethnic minorities, leading to potential future interventions.

ADEQUATE AFFORDABLE FAIR

More achieve their Pensions Commission Target Replacement Rate

Everyone meets the Minimum Retirement Living Standard

Include more people, including multiple job holders and the self employed

Increase contributions gradually for both employees and employers

Getting people saving younger increases saving years

State Pension increases ensures more people will avoid poverty in retirement

50/50 share of increased contributions by employers and employees

Removing the Lower Earnings Limit gradually Include more people, including multiple job holders and the self employed

Further work to assess the impact of the £10k earnings trigger

25. In summary we therefore propose:

FIVE RECOMMENDATIONS FOR REFORM

1) National objectives: The creation of clear national objectives for the UK pension system - ‘adequate, affordable and fair’ objectives - combined with regular formal monitoring of whether it is on track to achieve these goals;

2) State pension: Reform of the state pension so everyone achieves the Minimum Retirement Living Standard, to prevent pensioner poverty;

3) AE reform: Reform of AE so more people are included (including younger people, multiple job holders and gig economy workers) and at a higher level so people on median earnings are likely to achieve the Pensions Commission’s Target Replacement Rates (by removing the LEL and gradually increasing contributions from 8% to 12%);

4) Under pensioned groups: Additional policy interventions to help under pensioned groups (including women, gig economy workers, self-employed people and others), and;

5) Industry Initiatives to achieve better pensions: Actions to help people engage with pensions, receive higher contributions, and get better pension outcomes.

DRIVERS

SOLUTIONSOUR FIVE STEPS TO BETTER PENSIONS

27. We find that a package of measures build on one another and evolve AE to take account of changes to the workforce we see today and for the future. These include those where there is already consensus, and new elements designed to address particular shortfalls.

28. The following chart shows the cumulative impact, in pounds and pence, of all of our proposals in the report compared with the current situation for different income levels. For a median earner, the effect of our reforms is to increase their pension income from around £15,000 a year to around £19,000. The modelling shows that our core proposals work very well for median earners and higher earners, but further analysis will be needed to assess whether our proposals result in “over-saving” for some of those on lower incomes.

Figure three: Summary projected retirement income after the PLSA’s proposed framework changes against the current situation (including the removal of band earnings, increases to the state pension, increasing contributions to 12%)

CURRENT RETIREMENT OUTCOME

PLSA POLICY RECOMMENDATIONS

MINIMUM £10,900

Male Female

Male Female Male Female

£16,769 £17,768

£15,347 £14,927

£13,779 £13,569

£20,800 COMFORTABLE £33,600

+£7,460 +£6,131

+£3,834 +£3,589

+£2,878 +£2,755

£19,181 £18,516

£16,657 £16,324

£24,229 £22,899

This shows that for median earners their projected income after our proposals increases by approximately 25% or more than £3,500 for both men and women. They would be much closer to reaching a Moderate Retirement Living Standard, with men projected to reach their Pensions Commission Replacement Rate (74% on average, with their target being 70%) and women falling only just short of it (67% on average, with their target being 67%).

Twice median

median female

median male

Pensions Commission

Target Replacement Rate

Lower age to

removal of band earnings, State Pension minimum

age to 18, removal

band earnings, State Pension minimum

12%

aditional

Red denotes savers are not projected to achieve their Pensions Commission Replacement Rate, Green denotes savers are projected to achieve their Pensions Commission Replacement Rate after our proposals, Purple denotes savers are expected to exceed their Pensions Commission Replacement Rate, Amber denotes savers are within proximity of their target Pensions Commission Replacement Rate but are not expected to hit it,

Cross hatched indicates those that still risk becoming over pensioned under our proposals if they remain lower earners throughout their lives, and for whom mechanisms to protect from over saving will be crucial.

Where there is a risk of over saving further evidence should be gathered and explored on potential protections and mitigations. Initially we propose that these efforts should focus on potential changes to the ‘£10k earnings trigger’ and the effective use of temporary opt down models and other mechanisms.

29. Our proposals work together and build on one another to have a positive impact across several or all the inadequacies that we have identified. For example, affordable increases in new State Pension and the gradual removal of band earnings will have a significant positive impact on women, as well as on lower earners in general. The following table summarises our initial proposals by the different under pensioned group who might most benefit, with many proposals likely to benefit multiple groups.

MEASURES FOR UNDER PENSIONED GROUPS ADDITIONAL TO INCREASES TO THE STATE PENSION, REMOVAL OF

to better understand the needs of under pensioned groups, including intersectionality

30. We are very conscious of the current challenges to the workforce, including the long-term impacts of the pandemic, the current economic downturn and the impact of long-term weak wage growth and higher cost of living. We are also conscious of the wider factors beyond pensions that will need to be addressed, including access to emergency saving alongside our proposed reforms, funding of social care costs and the feasibility or otherwise of working later in life. We have therefore looked at these issues holistically and are proposing working towards a new consensus to achieve this roadmap over the medium term.

THE INDUSTRY IS ALREADY ENCOURAGING SAVER ENGAGEMENT AND ADEQUATE CONTRIBUTIONS

31. The recommendations also capture industry efforts in recent years to improve adequacy. Across three themes - increasing engagement, enhancing contributions, and improving efficiency of solutions – initiatives have improved the retirement outcomes and understanding levels of some savers, such as the Retirement Living Standards, Pension Quality Mark and the Pay Your Pension Some Attention Campaign. There have also been considerable efforts made by pension schemes and providers to engage their members. We want to identify which of these efforts – engagement, enhanced contributions and/or efficient products and solutionswill prove the most effective as the market evolves. We also need to support innovation, such as Collective Defined Contribution and Guided Retirement Income Choices, to make the most of DC saving.

THERE IS ALREADY AGREEMENT THAT EVOLUTION OF AE IS NEEDED

32. It’s now been five years since the PLSA first called on Government to:

Increase AE from 8% of band earnings to 12% of earnings by 2030, starting with increases from the mid-2020s, and;

Increase the scope of AE, including by redefining many gig economy workers as employees and piloting new solutions for the self-employed.

Others have also been calling for these and other interventions to improve pensions adequacy over the same period, including specific measures to address issues for women and lower earners.

33. It’s also five years since DWP’s 2017 AE Review concluded that the following changes should be made by the mid-2020s:

Lowering the age threshold for AE from 22 to 18, and;

Removing the lower earnings limit.

We are disappointed that in the time since the 2017 Review no material changes have yet been made to evolve AE, especially in the period before the Covid 19 pandemic and the current cost of living crisis. Every year that passes is another missed opportunity for improvement and given there is no clear timetable to implement these changes it makes it even more important that a clear objective, and independent monitoring against that objective, is agreed. Now is the right time to set the roadmap for reform.

34. We have and will continue to engage with a broad spectrum of stakeholders. These range from business groups to trade unions and charities. On the whole, we have found that efforts to improve adequacy, through routes such as our proposals, have received widespread support. Understandably, however, given the current economic environment, the business community is concerned about the increased operating cost of these proposals, especially in the short term. Our proposals are not intended to be introduced immediately and without taking account of affordability, nevertheless, these concerns make building a consensus on the

timeline for implementation all the more important. As expected, those most concerned with individuals’ living standards in retirement, such as pensioner and employee representatives and the pensions industry, are generally highly supportive.

BUILDING A CONSENSUS TO IMPROVE PENSIONS ADEQUACY

WE’RE WORKING TO BUILD A NEW CONSENSUS TO DELIVER A RESILIENT FRAMEWORK IN THE FUTURE

35. Our intention is to enable more people, including younger people, lower earners and multiple job holders, to achieve an adequate income in retirement, address issues for women and other under pensioned groups, help everyone to benefit from an employer contribution and avoid pensioner poverty crises in the future.

36. We intend the publication of our report to facilitate consensus building, evolving our collective thinking on a pensions framework for the current context, and to deliver a model that is future proofed. For this reason, this document marks the start of a period of consultation and discussion for all who have an interest in the future of the UK pensions system. We are encouraging engagement with us to take this debate forward through a consultation exercise of six months, including roundtables and other methods to gather evidence and views on these issues.

37. We have set out 12 consultation questions and invite stakeholders to send their views to us by the 31 March 2023. Please send them through to fivesteps@plsa.co.uk

Affordability concerns

Poverty concerns

Implementation concerns

Insufficient saving concerns

Employee representatives Business community

Pensioner representatives Pensions industry

Building a consensus

INTRODUCTION AND BACKGROUND

38. This report, and our Report Supplement to ‘Five Steps for Better Pensions: Time for a New Consensus, updates the available evidence base to augment existing knowledge on pensions inadequacy across the UK. This report continues work that the PLSA has done previously in this area in the Retirement Income Adequacy: Generation by Generation and Hitting the Target reports12,13.

39. The report is divided into the following sections:

Section one outlines the inadequate pension wealth and retirement outcomes facing the current UK population, including where other sources of potential retirement income wealth are utilised.

Section two focuses on our proposals for changing the UK pension system, starting with the right adequacy objective. We discuss the goals for adequacy, preventing pensioner poverty, the level and scope of AE and the affordability of proposed changes, including ensuring the current cost of living crisis does not become a permanent fixture for future retirees.

Section three highlights where the pensions industry can and has launched its own initiatives to improve adequacy.

Section four outlines the conclusions that can be drawn from our work, and sets out our findings, recommendations and the next steps to be taken to resolve pensions inadequacy.

12 https://www.plsa.co.uk/portals/0/Documents/0605-Retirement-income-adequacy-Generation-by-Generation.pdf

13 https://www.plsa.co.uk/Portals/0/Documents/Policy-Documents/2017/Hitting-the-target-delivering-better-retirement-outcomes. pdf?ver=2017-10-10-120119-607

TOO MANY ARE UNDER PENSIONED

SUMMARY

Our new research adds to previous studies that find very many savers are on track for inadequate pensions at best and are at risk of poverty at worst.

Even taking account of other potential sources of income – such as property – we find an unacceptably large proportion of the population is unlikely to meet their Pensions Commission Replacement Rate and, even more worryingly, some are unlikely to achieve the Minimum Retirement Living Standard, making pensioner poverty a very real prospect for many.

The outlook is even poorer for some groups – taken together the most under pensioned groups face poverty in retirement in large numbers according to our modelling and projections. Over 50% of the population will fail to meet the retirement income targets set by the 2005 Pensions Commission. Of those households currently saving into a DC pension our research finds that 62% will not achieve their target.

PENSIONS COMMISSION REPLACEMENT RATES

OVERALL 2004 INCOME BAND INCOME BAND IN 2021 EARNINGS TERMS14 TARGET REPLACEMENT RATE

Up to £9,500

Up to £15,000

£9,500 to £17,500 £15,000 to £27,500

80%

70%

£17,500 to £25,000 £27,500 to £39,300 67%

£25,000 to £40,000 £39,300 to £62,800 60% £40,000 or more £62,800 or more 50%

Retirement Living Standards15 demonstrate what life in retirement looks like at three different levels of expenditure, and what a range of common goods and services would cost for each level. Based on independent research with the UK public, the PLSA proposed a level of income for singles and couples that would enable them to have a Minimum, Moderate or Comfortable standard of living in retirement.

Retirement Living Standards are beneficial because they are designed to help savers engage with their pension saving by picturing their future at different living standards. They use highly respected Minimum Income Standard methodology16 . We also update the standards on a regular basis, carrying out further research with people across the country to ensure that they remain current, incorporating changes in the costs of goods and services as well as reflecting any changes in people’s expectations for retirement.

PLSA RETIREMENT LIVING STANDARDS

of working households

not achieve their Pensions Commission Replacement Rate, and; 62% of DC Saving households

Percentage Households

not achieve their Pensions Commission Replacement Rate.

Commission Replacement Rate

Population

Population

Population

Population

DC Population

DC Population

a reference point most are on track to meet the Minimum (with some notable exceptions in under pensioned groups). However, only 28% of households (4.8 million households, are on track to hit the Moderate retirement living standards, while only 8% of households (1.4 million households) are on track to hit the Comfortable retirement living standard.

Measuring against Retirement Living Standards

Percentage of households

retirement living standard

of DC households,

Retirement Living

42. For further findings on the current situation please see the research report that accompanies this report, which explores in more detail the different shortfalls for a variety of groups of savers and how our proposals tackle them.

43. It will be particularly important to tackle this projected inadequacy for the generation of savers who will be solely dependent on DC saving in the future. Fifteen times more people are saving into a DC pension than DB19. Our analysis shows that currently those with DB entitlements alongside their DC are much more likely to hit the Pensions Commission Replacement Rate and all the Retirement Living Standards respectively, than those who have no DB saving.

OTHER POTENTIAL SOURCES OF INCOME

44. Even when we take account of other potential incomes in retirement – such as property wealth, working longer, inheritance and other financial wealth – we find that a significant proportion of the population is likely to face an inadequate pension income.

Property wealth

45. One of the main sources of wealth for households in the UK is property wealth20. However, it is not sufficient to make a material difference to the retirement income of most people in the UK. Whilst property values have been rising, homeownership is declining with many people either not owning their own home or purchasing one much later in life21. The number of households owning their property peaked at 70.9% in 2003, falling to 63.9% in 201822. The average property value in the UK in May 2022 was £283,00023. People in the bottom half by income only have £33,600 in net property wealth on average 24

46. The limitations of housing wealth as a potential solution to inadequate pensions wealth is evident in our modelling. When we include the use of housing wealth in our analysis more of the population are on track to meet both the Pensions Commission Replacement Rate and, particularly, the Moderate Retirement Living Standard. However, it’s worth noting that this is an increase compared with an already low starting point.

Only 53% of the working population and 50% of active DC savers are projected to achieve their Pensions Commission Replacement Rate even once housing wealth is included.

Only 10% more working households and 9% more active DC savers will reach the Moderate Living Standard if housing wealth is included (compared with 30% for working households and 35% for active DC savers without housing wealth).

https://www.thepensionsregulator.gov.uk/en/document-library/corporate-information/corporate-plans/tpr-strategy-pensions-of-the-future

NimbleFins analysis based on Wealth and Assets Survey Data’ add hyperlink: https://www.nimblefins.co.uk/savings-accounts/average-house hold-savings-uk#:~:text=The%20average%20savings%20in%20the,and%20other%20formal%20financial%20assets

https://www.comparethemarket.com/home-insurance/content/future-of-home-ownership/

https://www.brookings.edu/essay/uk-rental-housing-markets/

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/may2022#:~:text=Image%20.csv%20.xls,The%20aver age%20UK%20house%20price%20was%20%C2%A3283%2C000%20in%20May,(April%20and%20May%202021).

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/ april2018tomarch2020

Figure seven: Percentage of households reaching their Pensions Commission Replacement Rate if housing wealth is used

47. A further issue with relying on property wealth is that, for the vast majority of homeowners, it is an illiquid asset. The number of buy-to-let landlords, who may be in the advantageous position of gaining a retirement income from renting their property out, remains relatively small at 2.7m in 202025. Equity release sales have also not yet recovered to the trajectory expected before the pandemic, though sales are steadily now increasing26. The consequence of this is that many people are unable to rely on property wealth for income. This is exemplified by Legal and General’s research which found that, in 2022, even those over the age of 65 who own their own home, 70% are ‘state pension dependent’27 . Another challenge is that an increasing number of people are renting in retirement; between 2010 and 2020 over 65s renting increased by 93%28. By 2046, it is predicted that the number of people of retirement age in the private rental sector will double to 12%29

Inherited wealth

48. In the UK, there are over 11.6 million people who have received an inheritance in the past 10 years. The average age at which they have received it was 47. Only 22% of all adults receive a cash-based inheritance. This figure rises to 29% for those aged 65-7430. Inherited wealth is not equally distributed, with there being a substantial divide in the amount those in the top wealth quintile receive compared to those in the lowest quintile. From 2014 to 2016, the median inheritance for those in the highest quintile was £35,000, with the lowest quintile

https://www.ludlowthompson.com/property_news/number-of-uk-landlords-hits-record-high-of-27m-1879

https://www.equityreleasecouncil.com/wp-content/uploads/2022/08/220729-Equity-Release-Council-Q2-2022-stats-news-release-FINAL-2.pdf

Legal and General – Retirees

on State Pension https://group.legalandgeneral.com/en/newsroom/press-releases/22-of-workers-planto-use-their-home-to-fund-their-retirement-as-house-prices-continue-to-soar

https://www.thisismoney.co.uk/money/buytolet/article-8884541/Number-retired-renters-doubles-decade.html

258750(1)

Buy or Not To Buy

(pensionspolicyinstitute.org.uk)

receiving just £3,00031. Currently, 46% of people in the UK receive, or expect to receive, some form of inheritance. However, this is forecast to drop to 32% by 204232. This, combined with the difficulty in predicting when an individual will inherit, means it is an unreliable source of wealth to provide for retirement income.

Financial wealth

49. Net financial wealth plays a very minor role in overall wealth for the poorest half of the population. This is over 33 million people. For the bottom half of the population, the median net financial wealth is just £2,06033. This is not a significant sum when considered for potential conversion into retirement income. Savings and other financial assets, over certain thresholds will reduce entitlement to certain benefits, including, but not limited to, pensions credit and housing benefits. They contribute to capital assets which are included in means testing for housing benefit and council tax support.

Working later in life to accumulate more pension wealth

50. Since the early 2000s, there has been a seismic shift in working age patterns. From 2000 to 2020, the number of 50–64-year-olds in the workplace rose from 6.2 million to 9.3 million. The total figure of over 50s in the workforce was 10.56 million in 2020. The pandemic has caused a slight reversal in this trend with the figure dropping by 1.36 million in 202234. The increase in women working for longer is the main factor as to why it is predicted that the number of over 50s in the UK labour force will rise from 42% in 2020 to 47% in 203035. An underlying reason behind those aged 50-64 working for longer is that they have seen their share of total wealth shrink from 42% in 2008 to 36% a decade later36. The main challenge to relying on working later in life to ensure an adequate retirement income is that those most in need, such as those with lower pension saving, are often correlated with those least able to work due to health constraints37

THE MOST UNDER PENSIONED GROUPS

51. We have also explored the available evidence for the inadequate pensions of the future faced by under pensioned groups, including women, ethnic minorities, those that work in different patterns such as multiple job holders, part-time workers and gig economy workers, the selfemployed and different generations. We find that for some the outlook is poor unless the pensions framework is evolved to future proof it for workers in the modern economy.

31 https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/articles/intergenerationaltransfers thedistributionofinheritancesgiftsandloans/2018-10-30

32 https://www.oakwaywm.co.uk/resources/oakway-weekwatch-why-do-46-of-people-leave-inheritances-in-savings-accounts/

33 https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/ april2018tomarch2020

34 https://ageing-better.org.uk/work-state-ageing-2022

35 https://group.legalandgeneral.com/en/newsroom/press-releases/proportion-of-over-50s-in-work-set-to-hit-record-high-of-47-by-2030-accord ing-to-new-report

36 https://group.legalandgeneral.com/en/newsroom/press-releases/proportion-of-over-50s-in-work-set-to-hit-record-high-of-47-by-2030-accord ing-to-new-report

37 https://www.tuc.org.uk/news/twice-many-older-workers-have-left-labour-market-due-sickness-retirement-during-pandemic-tuc

EARNERS

LACK OF OBJECTIVES AND GOALS

INSUFFICIENT STATE PENSION

MINORITIES

PENSIONS GAP

JOB HOLDERS

FEWER REMAINING SAVING YEARS

EMPLOYED

INSUFFICIENT PRIVATE PENSIONS ADJUSTMENTS FOR MISSED AND REDUCED SAVING

AND INSECURE WORKING PATTERNS

PART TIME WORKERS

DRIVERS OF UNDER SAVING

According to the Chartered Institute of insurance “by the age of 60–64, women have an average pension wealth of £35,700”.

The Prospect trade union calculated the gender pay gap to be at 38% in 2020, over double the pay gap for the same year (16%)[1]

Despite a UK divorce rate of 40-50%, an estimated 71% of divorcing couples overlook pension sharing[2], despite private pension wealth often being one of their largest assets, and in most cases it is the woman who loses this wealth.

38% of female workers are part time[3]

The average gap between a female pensioner from an ethnic minority group and a male pensioner from a white ethnic group is 51%. Estimates suggest that the ethnicity pension gap by pensioner income is likely to be approximately 25%.

According to the PPI the groups most likely to risk failing to reach the equivalent of the RLS minimum on state and private pension income include:

• Single person households, who are around four times more likely to be below this level (51% of people in single person households),

• More than two thirds of renters (70%), which rises to 87% of renters in London, and

• Low-income households are twice as likely to risk missing this level (50% risk).

New evidence from the PLSA

Our findings on self employed are mixed, which suggests further work will need to be done. We find that only 10% (compared with the already very low 38% of the rest of the population) population are projected to reach their Replacement rate, though all of the self-employed population are expected to reach RLS minimum (whereas nearly 20% of the total population are not).

Part time workers represent 25% of the overall workforce[4], and 71% of part time workers do not want full time work[5].

Research from NOW: Pensions and the PPI indicates that on average multiple job holders who earn less than the £10k trigger in each job build retirement savings of just £12,400 by the time they reach their sixties. This is just 5.7% of the UK average (of £217,490) for someone reaching retirement age.

GENDER PENSIONS GAP

52. The gender pay gap appears to be a main driver of the gender pensions gap. The pensions system is a stark manifestation of other issues associated with differences in pay and working patterns across a lifetime. One might argue that it is a fault of the design of the UK pension system that, by weighting so much towards the contributory principle, and with a relatively low value State Pension, that even with credits, there is little to equalise the gender balance. Indeed, PPI research from 2019 highlights this disparity in private pension provision, citing that women in their 60s had a third of the private pension wealth than men38.

53. Beyond the gender pay gap39, the causes of women’s inadequate pensions include the scope of the AE system itself, which disproportionately excludes women from saving. Women are more likely than men to be on low salaries, in part time work or hold multiple jobs, so are disproportionately affected by over saving protections such as the £10k earnings trigger and the Lower Earnings Limit. More women than men either do not qualify for AE or only have contributions paid on a smaller proportion of total earnings40. For example, evidence suggests around 32% of employed women do not meet the qualifying criteria for AE compared to only 16% of men41 .

54. Further, women on average spend longer than men outside of the labour market42. This typically takes the form of time off to have children, and for caring responsibilities. While national insurance credits can still be built up towards state pension entitlement during these times, in private pension terms they often represent significant gaps in contributions, or – as is the case during part-time work – less is contributed. The following illustration provides an example of the impact of our proposals, compared with the current situation, for a woman with a mix of part and full time working, with a short career break; in other words, a ‘typical’ employment and pension saving pattern.

eight: Illustration of the cumulative impact of our proposals showing annual net pension income for a representative female, with a mix of full and part-time work in her career, and a short career break

For this representative female earner, for example, their projected retirement income increases from £13,778 to £17,176, which equates to an approximate 25% increase in retirement income.

ETHNIC MINORITIES

55. The main identified causes of the ethnicity pension gap include:

1) State pension inequalities given the different average rates of employment for some ethnicities43,

2) The current structure of AE, with the lower earnings limit and the £10k earnings trigger which exclude people of non-white ethnicity disproportionately44 ,

3) The high proportion of ethnic minorities who are not a member of any kind of pension45 ,

4) The ethnicity pay gap, and the cumulative effect of this over time46, and;

5) Renting approaching retirement and in retirement is more common for those from BAME backgrounds47 .

56. Recent research work has found that sample sizes are typically inadequate to allow understanding of the many different factors which affect the outcomes of different groups, and better data and evidence about the lives of people in these groups is needed48.

‘INTERRUPTED OR INSECURE WORKING PATTERNS

57. Through a combination of being lower paid and part time, non-full-time working patterns result in many not qualifying for AE. There are also 1.2 million people with multiple jobs. PPI data shows that multiple job holders overall earn on average 39% less than the average worker, and so they may already be disadvantaged, as other lower income groups are, by the heavy reliance on the contributory portion of the pensions framework49 .

58. Employment in the gig economy sector has grown rapidly in recent years; the Chartered Institute of Personnel and Development50 revealed that in 2017 1.3m (4% of all in employment) workers were employed in gig roles, while Ipsos Mori data suggests that between 2016 and 2019, those working at least once a week for online labour platforms in this manner doubled to 10% of the UK workforce51. The pandemic has only accelerated this trend since, and Zurich data52 indicates that one in six workers now classify as gig workers. As ‘gig’ work makes up an increasing share of incomes it is right that we consider pension provision, including possibilities to extend the success of AE to those employed in these industries. Currently we

Retirement Report 2020, Scottish Widows

https://ageing-better.org.uk/sites/default/files/2021-11/boom-and-bust-report-the-last-baby-boomers.pdf

https://www.pensionspolicyinstitute.org.uk/media/4132/20220818-ppi-bn132-data-from-ethnic-minority-groups-final.pdf

For example, https://www.pensionspolicyinstitute.org.uk/media/3679/20201208-the-underpensioned-index-report-final.pdf

https://www.cipd.co.uk/Images/to-gig-or-not-to-gig_2017-stories-from-the-modern-economy_tcm18-18955.pdf

https://www.feps-europe.eu/attachments/publications/platform%20work%20in%20the%20uk%202016-2019%20v3-converted.pdf

https://www.aegon.co.uk/news/ae_could_give_gigeconomyworkersp75000pots.html

are aware of very little available evidence about the degree to which gig economy workers are under pensioned or, indeed, ineligible for AE, as compared with other groups (for example, lower earners, part-time or self-employed savers) with whom they may share many otherwise similar characteristics.

FEWER REMAINING SAVING YEARS

59. Saving for a shorter period under AE reduces the likelihood that enough saving has occurred to achieve an adequate income in retirement. Shorter saving periods affect both younger savers, who have only recently joined the workforce, and older savers who have only benefited from AE in later years. In the cases of older generations there are also reduced potential working years left to save. For this reason, we find that on average Generation X are the least likely to meet their Pensions Commission Replacement Rate compared with millennials (who have longer to save) and Baby Boomers (who have other sources of income such as DB entitlements). Other sources of potential income in retirement, including property wealth and working longer, may be beneficial alongside saving. Where younger households are projected to meet higher Retirement Living Standards this is frequently because they have access to accrued DB entitlement, or they have DB entitlement still in accrual. For these reasons we find millennials are far less likely to reach higher Retirement Living Standards, and Generation X face real uncertainties for their pension incomes in retirement. Tables illustrating the findings of our initial work are included below, but further assessment on the likely impact of our proposals on different generations will be worth exploring.

PERCENTAGE HITTING THE PC TARGET REPLACEMENT RATE

Millennials Generation X Baby Boomers

Replacement Rate

The analysis shows that most households are on track to hit at least the Minimum Retirement Living Standard, with 20% of Baby Boomers, 21% of Generation X and 16% of Millennials set to miss the standard.

PERCENTAGE HITTING THE RETIREMENT LIVING STANDARD

Millennials Generation X Baby Boomers

RLS Minimum

1. DISCUSSION QUESTION: DO YOU AGREE WITH OUR FINDINGS ON THE CURRENT STATE OF UNDER SAVING?

AE 2017 REVIEW FINDINGS – GOVERNMENT COMMITMENT

60. Government has repeatedly committed to implementing the recommendations of the Review – notably reduction of the qualifying age and removal of the Lower Earnings Limit. These interventions were found to have a disproportionately positive effect on under pensioned groups – particularly lower earners and women. Our new research supports this, and we remain very supportive of gradual, phased implementation of these proposals as soon as the time is right.

OUR ASSESSMENT OF THE DRIVERS OF UNDER SAVING

61. In our view the available information provides sufficient evidence to establish the drivers of under saving across the population, including under pensioned groups. We believe these are:

A lack of objectives and goals, that are monitored across time, and to which the framework is calibrated to achieve as working patterns evolve.

The state pension does not provide sufficient protection from pensioner poverty, especially for those that will struggle to save enough to deliver a significant private pension in retirement.

In addition, compounding the effect for those struggling to save, the scope of AE is excluding too many, particularly lower earners, who are disproportionately also women, people with different working patterns (such as part time workers and multiple job holders) and ethnic minorities.

There are insufficient private pension saving modifications and ‘compensation’ to adjust for periods of missed or reduced saving (for example, when people take time out of work for caring responsibilities). Reliance on the state pension will therefore remain high for these groups. Objectives and monitoring of the effectiveness of the whole pension framework should be introduced to ensure that those who miss out can still achieve an adequate income in retirement.

The level of AE is not sufficient to ensure that all, particularly median and higher earners, are contributing enough to translate into a reasonable standard of living in retirement according to Pensions Commission Target Replacement Rate methodology. Without other changes to AE, engagement with their pension is required for savers to address this issue by themselves, while all evidence suggests most will likely not realise they are under saving until much of the opportunity for them to address this has passed.

2. DISCUSSION QUESTION: DO YOU AGREE WITH OUR ASSESSMENT OF THE DRIVERS OF UNDER SAVING?

WE NEED TO EMPOWER FUTURE WORKERS BY AGREEING NOW ON THE FUTURE OF THE UK PENSION FRAMEWORK

SUMMARY

It is crucial that adequate, affordable and fair goals are set for pensions adequacy for the UK pension system as a whole. This is to ensure that policies supporting each element of the system – state pension, AE, voluntary pension saving and other sources of income – can be calibrated to achieve these objectives.

As a foundation, the Government should continue to raise the State Pension to a level that protects people from living in poverty in retirement. We have modelled the effect of increasing the state pension to the Minimum Retirement Living Standard level and find that this has a very positive impact on pensions adequacy, particularly for lower earners, under pensioned groups and the gender pensions gap.

The Government should prioritise the gradual removal of the Lower Earnings Limit from the band of salary used for AE purposes, as recommended in the AE Review 201753

We have modelled the removal of all band earnings to assess the effect on pensions adequacy across the whole population.

Government should increase minimum AE contributions to: 12% of salary over the course of the early 2030s, Reaching 10% by 2030 through ‘levelling up’ employer contributions (increasing them by 2% so it matches the current employee contribution), and finally; Increase both employer and employee contributions by a further 1% each in the early 2030s so that employers match those of employees on a 50/50 basis.

We set out a proposed timeline for this, as our modelling finds this to be significant for savers’ future retirement income. We also explain how affordability of the measures have been assessed.

The scope of AE should be reviewed, including deliberate exclusions by age as well as inadvertent or practicality-based exclusions for the self-employed and gig economy workers, and measures for otherwise under pensioned groups.

Wee model the overall combined effect of the package of proposals across the whole population and find that the cumulative effect of the proposals achieves greater adequacy for many.

We propose that there should be further research into potential changes to the £10k earnings trigger and the effective use of temporary opt down models and other mechanisms to protect from over saving where there is a risk of this occurring. We also need support for innovations, such as Collective Defined Contribution and Guided Retirement Income Choices, to make the most of DC saving.

62. As the UK framework does not have a clear adequacy objective, or regular monitoring of what is being achieved on this issue, it is no surprise that people’s retirement income is likely in many cases to fall short of the retirement income goals set by the Pensions Commission.

63. We have systematically reviewed and assessed the current pensions framework and find five key elements of reform are likely needed to begin to future proof the pensions framework for the benefit of future retirees. We have found that to empower retirees of the future, and provide them with sufficient income to achieve a dignified standard of living and avoid poverty, we need to take these next steps to continue the work of the Pensions Commission:

SET NEW GOALS FOR THE UK PENSIONS FRAMEWORK, WHICH SHOULD BE ADEQUATE, AFFORDABLE AND FAIR

SET A STATE PENSION

ENSURES

THE UK HAS

SETTING ADEQUATE, AFFORDABLE AND FAIR GOALS FOR PENSIONS ADEQUACY

64. We believe that the current lack of objectives of the pension system in the UK is placing the pensions system at risk of short-termism which may be jeopardising longer term adequacy.

65. UK pension system goals should be designed so that to provide for a ‘floor’ below which people do not fall, and a saving structure (automatic, voluntary pension saving and additional sources of wealth) that enables people to achieve enough pension saving. Using a replacement rate methodology, in line with the Pensions Commission assessment, helps people to achieve income replacement in retirement, and combining this with an absolute ‘floor’ which protects all against poverty.

66. UK pensions system goals for the UK should be designed so that:

Everyone in the UK has a retirement income that is equal to, or above, the Retirement Living Standards minimum level.

AE saving will need to get people most of the way to achieving an income level to meet the Pensions Commission’s Replacement Rate relevant to each individual’s in-work income, with voluntary pension saving and other sources of income and saving also contributing in some cases. In practice this might mean:

a. Someone on half median earnings (currently approximately £15k per annum) should expect to achieve a replacement rate of around 80% of former income, and certainly no less than the Minimum Retirement Living Standard level (much of this may need to come through non-contributory means, such as the state pension, to protect from over saving for those at risk of this).

b. Someone on median earnings before retirement should be able to achieve a replacement rate of around 67-70% of former income, and;

c. Someone on twice median earnings before retirement should be enabled to achieve the replacement rate of around 60% of former income. This may be achieved through a combination of AE and additional voluntary saving.

The Retirement Living Standard levels remain a very appropriate communication tool in part because they are approximately equivalent to the relevant Pensions Commission Replacement Rate for people at different points on the in-work income distribution; the Moderate Retirement Living Standard roughly equates to the relevant Pensions Commission Replacement Rate of around 70% for median earners, and the Comfortable Retirement Living Standard roughly equates to the relevant Pensions Commission Replacement Rate of around 60% for twice median earners.

67. Pensions Commission Replacement Rates are widely regarded as an appropriate method for assessing pensions adequacy, as individuals can maintain the in-work consumption in retirement with less than 100% replacement of in-work income (for example, due to lower housing costs), though those on lower incomes require (and desire) a higher replacement rate to reach a minimum standard of living. A review of the bases for the Pensions Commission Replacement Rates, alongside the adjustment to the income brackets, may help to keep them appropriate over time.

68. However, this approach fails to take account of what a reasonable minimum standard of living is. We would go further and ensure that the system is designed to protect people from saving for a pension income that will equate to less than a reasonable minimum standard of living, while also recognising that it would be inappropriate for people to automatically save so much in working life that they, inadvertently, end up with an income in retirement much higher than their working income.

A summary introduction to our proposals and how they help to achieve these proposed objectives

ADEQUATE AFFORDABLE FAIR

Our proposals will help most people achieve the Pensions Commission’s Target Replace ment Rates.

Our proposals only involve modest contribution increases for employees (removal of AE band earnings and 1% extra from early 2030s) and spread over a 10-year period.

By increasing the State Pension to the Minimum Retirement Living Standard, our proposals ensure that everyone, in par ticular under-pensioned groups such as women, part-time workers, and the self-employed, will have a pension that protects against poverty.

Our proposals ensure that everyone, whether they do paid work or not, will at least have a retirement income equal to the Minimum Retirement Living Standard.

By broadening the scope of AE to include multiple-job holders who earn more than £10k in aggregate but where no job pays more than this, we will ensure greater pension adequacy for this under-pensioned group.

By introducing a revised version of AE for the self-employed, we will extend pension adequacy to this large and growing group.

Our proposals do involve a 3% increase for employers, but this is not introduced until late in the 2020s and could be spread over many years to make it more affordable.

We recommend additional analysis into whether higher AE contributions are afforda ble for those on lower earnings and, in particular, whether new mechanisms such as temporary opt down should be introduced and whether the £10k earnings trigger is set at the right level.

By starting AE pension saving at 18 rather than 22, pension saving will be more affordable as the cost is spread over more years and help address gaps for those that have incomplete work histories later in life.

Increasing the proportion of incomes eligible for AE by removing the Lower and Upper Earnings Limits will be done gradually and in a way that is sensitive to costs for both em ployees and employers

Our proposals introduce a 50:50 approach for employers and employees to make pension saving.

By broadening the scope of AE to include multiple-job holders who earn more than £10k in aggregate but where no job pays more than this, we will include a historically excluded group.

By introducing a revised version of AE for the self-employed, they too will benefit from the ease of this form of pension saving.

3. DISCUSSION QUESTION: DO YOU AGREE WITH OUR PROPOSED OBJECTIVES OF A NEW UK PENSIONS FRAMEWORK?

ACHIEVING A RETIREMENT INCOME FOR ALL THAT IS ABOVE AN ACCEPTABLE DEFINITION OF POVERTY

69. The Pensions Commission hoped that though the replacement rate achieved by the State Pension might reduce over time as this became less generous, lower incomes would be supplemented by private pension saving through AE and other means tested benefits. However, our research has found that this is not currently working as expected for a variety of reasons including many exclusions from AE, a lack of voluntary saving, detrimental interactions with other in-retirement state support and other factors such as the changing nature of the workforce. We therefore propose that the best way to achieve this is for the state pension to gradually increase to a level that avoids poverty in retirement for everyone. It is important that the state pension ensures no one is at risk of poverty in retirement and that that the definition of poverty used is set clearly above the “destitution” level (currently approximately £8k a year) and the relative poverty level (60% of median earnings, or currently approximately £20k a year). Doing this through contributory models alone could induce hardship, particularly for lower earners, during their working lives.

Communicating targets for income in retirement – PLSA’s retirement living standards

Retirement Living Standards are a highly successful and popular approach for communicating with savers about how to picture their future in retirement in terms of three levels of future expenditure54 .

Before they were introduced our research found that 77% of savers didn’t know how much they would need to save in retirement.

More than 35 million savers now have access to the Standards through their pension scheme’s communications55

They are based on a rigorous and well-regarded methodology using the British public, with extensive research undertaken by Loughborough University’s Centre for Research in Social Policy, who also developed the Minimum Income Standard for the Joseph Rowntree Foundation.

In the past, before Retirement Living Standards, assessments of under saving and pensions inadequacy favoured either absolute poverty measures or population level replacement rate of working income methodologies.

70. Pensioner poverty is partly driven by the inadequacy of the state pension. Recent statistics published by the Department for Work and Pensions show that 1.9 million people who qualify for the state pension were receiving less than £100 per week56 . In addition to this, reforms to the state pension age have resulted in more people entering poverty. The Institute of Fiscal Studies has found that raising the state pension age, which prevented 700,000 people from claiming state pension for another year, led to a 14% increase in those aged 65 in poverty

71. A significant reason why the state pension needs to increase is due to the decision in 1980 to link the Basic State Pension to prices, instead of incomes. We are highly supportive of the Triple Lock. However, as prices of goods increased slower than incomes over this period, it is estimated that the Basic State Pension lost 40% of its value relative to average earnings58. Even using very optimistic estimates and contextual assumptions it will take more than twenty years for the state pension to increase to meet the Minimum Retirement Living Standard59 . Furthermore, the UK lags far behind the OECD average 75% of retirement income made up of state pension and benefits in retirement; the state pension in most European Union countries makes up a greater proportion of retirement income than the UK which comparatively is circa 50%60,61

72. State pension increases are also one of the sole mechanisms to adjust for in-work inequalities while meeting our affordability principles and addressing the drivers of inadequacy, and is therefore the right mechanism to address these that follow people into retirement. Unsurprisingly, those most likely to face poverty in retirement by being in an under pensioned group are those that are already at greater risk of poverty in work (such as single mothers and ethnic minorities) or those out of work (disproportionately ethnic minorities, but also those who take time out to care for children and vulnerable people). Women, lower paid workers and otherwise under pensioned groups will disproportionately benefit from an increase in the state pension. For more information see our Report Supplement published alongside this document.

73. Improvements to the state pension can also have the added benefit of reducing the amount that the government spends on in-retirement welfare payments and reducing the administrative and assessment burden of claiming and allocating those payments for both individuals and the state. Low-income pensioners can claim means tested benefits such as Pension Credit, Housing Benefit and Carers Allowance, amongst other programmes. Improving the state pension will reduce the level to which people rely on these programmes to avoid poverty, which is in line with the Pensions Commission’s intent.

Lower earners are more likely to reach their Pensions Commission Replacement Rate than those with higher incomes, because the state pension already represents a greater proportion of their working income. Our new research finds that Replacement Rate methodologies may disguise the true inadequacy of their outcomes; when analysing projected outcomes against

is also adjusted to take account of the cost of living and prices of goods and services.

is a complex area, but

pension

higher

after a greater number

example, in France, Germany and Italy). SN00290.pdf (parliament.uk)

more closely earnings

standard of living measures of adequacy, they are likely to achieve far less than halfway between a Minimum and Moderate Retirement Living Standards levels. This is one of the key reasons why the state pension level is so important for everyone to achieve an adequate, affordable and fair income in retirement; without a poverty-avoidance measure in-built in the framework people risk appearing on track, or even at risk of ‘over saving’ based on their Replacement Rate but in practice this disguises both extremes of either retiring ‘over pensioned’ or struggling to live in practice on an income that is too low; without a povertyavoidance measure in-built in the framework people risk appearing on track, or even at risk of ‘over saving’ based on their Replacement Rate but in practice this disguises both extremes of either retiring ‘over pensioned’ or struggling to live in practice on an income that is too low.

75. It is right in principle to ensure that the state pension protects against poverty and allows people to fully take part in society, albeit at a modest level of income. The current State Pension goes a long way to achieve this, but it needs to go further. This will entail higher costs, but these are the costs of an ageing society. It is also the case that current mechanisms such as the Triple Lock, if continued, will gradually reach this higher level. We are interested in hearing the views of stakeholders on whether this proposed increase is the right thing.

4. DISCUSSION QUESTION: DO YOU AGREE THAT THE PRIMARY ROLE OF THE STATE PENSION SHOULD BE TO PROTECT THE POPULATION FROM PENSIONER POVERTY, AND WOULD YOU CONSIDER THE MINIMUM RETIREMENT LIVING STANDARD A SUITABLE MEASURE OF THIS LEVEL?

GETTING MORE PEOPLE TO SAVE MORE INTO WORKPLACE PENSIONS

GRADUAL REMOVAL OF THE LOWER AND UPPER EARNINGS LIMIT

76. The removal of the Lower Earnings Limit of £6,240 is one of the few changes to the AE regime which would benefit the pensions adequacy of all under-pensioned groups. The value of removing the Lower Earnings Limit is that it would ensure anyone who works and earns above the £10k earnings trigger, would be eligible to receive employer contributions on more of their salary if they either choose to opt in or are automatically enrolled. This would result in, for example, the partial eradication of inequalities between part time workers and others that work different patterns, and is likely to be particularly beneficial to women given that 65% of multiple job holders are women and 40% of women work part time. Removal of band earnings in general are likely to have a great impact for men’s future retirement income, too. For further information please see our Research Supplement.

GENDER PENSIONS GAP

77. Further interventions are required to address the gender pensions gap, in addition to the removal of the band earnings to save from the first pound and so including disproportionate more women, lowering the age to 18 which increases saving ahead of employment breaks, and increasing contributions to address under saving. One of the key drivers for under saving we identified is the insufficient additional private pension adjustments for periods of missed or lesser saving.

78. The PLSA’s view is that guidance for pension sharing on divorce can form an important part in improving pension adequacy. Despite a UK divorce rate of 40-50%, an estimated 71% of divorcing couples overlook pension sharing, despite private pension wealth often being one of their largest assets and in most cases, it is the woman who loses this wealth.62

79. We also believe there is merit in further consideration of the potential implementation of a family carer top up given that time out of work has such a significant impact on the pension outcomes of women. According to the PPI a top-up would make up half the pension saving missed out on when taking time away from paid work to care, and so would reduce the gender pensions gap by up to 28% as more women qualify to receive this benefit than men (1.5 million women compared to 150,000 men). A first step might be to consider how costly and complex this might be to implement

.

INCREASING CONTRIBUTIONS GRADUALLY TO 12%

80. Our research suggests that unless action is taken, around one in five DC saving households will fail to achieve the Minimum RLS, and three in five households will have inadequate pensions. To prevent more than 6 million people retiring in poverty workplace pensions saving contributions need to be higher. This means both increasing contributions gradually, and in a manner that is sensitive to current and future affordability concerns for both individuals and businesses, to reach 12% by the early 2030s. Firstly, the employer contribution should increase to match that of the employee, and then both the employer and employee contributions should increase to reach the new level. This will put many more people on track to achieve a more adequate income in retirement. This means both increasing contributions gradually, and in a manner that is sensitive to current and future affordability concerns for both individuals and businesses, to reach 12% by the early 2030s. First, the employer contribution should increase to match that of the employee, and then both the employer and employee contributions should increase to reach the new level.

81. As we have found in our Report Supplement, the current framework, including 8% contributions, is likely to lead to inadequate pensions for millions of people.

82. We believe that 12% should become the new default contribution level, and that this should be introduced on a gradual basis over the next decade. This should be achieved by, first, reaching a total of 10% by ‘levelling up’ the employer contributions (increasing them by 2%) so that they match the current employee contribution of 5%. Secondly both employer and employee contributions should increase by a further 1% each in the early 2030s so that employer and employee contributions both reach 6% each on a 50/50 basis.

that individuals in these

Figure nine: Cumulative impact of proposed PLSA policy options on Pensions Commission Replacement Rates

83. The following charts breaks this average finding out by income and gender, to illustrate the effects of increasing to 12% across the population, on average:

Current Situation

Cumulative impact on Pensions Commission Replacement Rate Target Replacement Rate

Lowering age

18 Plus

contributions

12%, plus

additional

Twice median female

Twice median male

Median female

Median male

Half median female

Half median male

Red denotes savers

not

Pensions Commission

Rate,

achieve

Pensions Commission

84. Our modelling across the whole population of savers contributing at 12% from age 18 suggests that half median earners would reach a standard of living more than halfway between the Minimum and Moderate RLS; median earners would be further towards moderate and twice median earners would now achieve the Moderate level (RLS levels assessed at the standard for singles)64.

85. The blue boxes above illustrate that using the Pensions Commission Replacement Rate as a measure lower earners are already at risk under the current system of over saving or being over pensioned if they remain earning, for example, a less than half median salary throughout their life. Although they meet the Pension Commission Replacement Rate of 80% of former earners, they do not achieve the Minimum Retirement Living Standard level, and so fall below a widely accepted minimum standard of living. Moreover, for many people, incomes change throughout working lives (for example, increasing with age, changing with work patterns and with different trajectories across generations65) and so concerns remain about whether we know sufficient information to be assured of their true pensions adequacy or inadequacy across their whole lifetime.

86. In combination with the 2017 AE Review proposals, and our other proposals covered elsewhere in this report, we observe significant positive increases in the overall projected outcomes of median earners by increasing total contributions to 12%.

Figure ten: For median earners the following chart shows the impact of lowering the age of 18, removal of band earnings, setting the State Pension at the Minimum Retirement Living Standards and increasing contributions to 12%

£15,000

Current

18+

State pension

Age 18+ RBE + SP Min RLS+

This illustrates that without our interventions median earners would suffer an approximate 30% reduction in income immediately after retiring (or more than £6000 reduction in income). After our interventions we can reduce this reduction to only approximately £2000 (or 10% reduction). This equates to an approximate 25% increase between the current projected retirement incomes of median earners and the income they would be projected after our proposals were fully implemented.

87. We propose that this should be done gradually, starting when the time is right, to ensure that it is affordable for both savers and employers, and that the effects on achieving the objectives of a new UK pensions framework can be measured throughout.

YEAR ONE YEAR TWO YEAR

YEAR 6 YEAR

employee

88. Finally, for those savers for which 12% is not enough, a further 4% of voluntary saving should be encouraged, for example through enhanced voluntary saving, on top of this so that they reach 16% total contributions. In combination with our other proposals for both men and women earning median and twice median incomes, additional voluntary contributions of 4% from the employee would be needed to safely meet and surpass the moderate retirement living standard. For further information, please refer to the supporting research report and the Industry Initiatives section later in this report.

89. The increase of both mandatory and voluntary contributions will mean those on median earnings will get closer or hit the moderate level of income, men hitting the moderate and women coming just short of the standard.

90. One of the drivers we identified of under saving was the need for savers to contribute enough despite not realising the scale of their under saving, or only realising once the opportunity for them to address it has passed. For twice median earners, both men and women will move from over midway between minimum and moderate RLS to surpassing the moderate Retirement Living Standard with an increase to 12%, and further voluntary increases beyond this level.

Figure

£45,000 £40,000 £35,000 £30,000 £25,000 £20,000 £15,000 £10,000 £5,000

£39,263£41,309

Impact of lowering age to 18,

increasing

voluntary contributions

twice median

the State Pension at the minimum RLS,

income at 67

£16,769£16,768 £17,153£17,106 £19,510£18,624 £20,863£19,977 £24,229£22,899

£25,821 £27,594

COMFORTABLE £33,600

MODERATE £20,800

£10,900

Current situation Lower age to 18 Removal of band earnings RBE + State pension min RLS (SP Min RLS)

For those on twice median

+ SP Min RLS

Increase

18 + RBE + SP Min RLS + Increase

12%

HELP LOW INCOME OR OTHERWISE UNDERPENSIONED GROUPS WITH ADDITIONAL MEASURES

91. We also propose additional interventions alongside some further work to better understand approaches to tackling issues for under pensioned groups.

92. Though it is complex to replicate AE for the self-employed, the Government is right in aiming to extend AE-inspired pension saving to them. We recommend that any solution takes account of their key preferences, notably trust, flexibility and control. Our research does cover some self-employed people, though the results are mixed given the broad and varying circumstances of individual self-employed people. We believe an array of interventions may make a positive impact on self-employed people’s future retirement income, including:

Supporting HMRC nudges and Money Helper Mid Life MOTs for self employed

Reducing barriers for master trusts to offer pensions for the self employed

Making it easier for trusted sources to discuss pensions with self-employed people

Exploratory research to better understand self-employed people’s pension needs

93. As we mention above, though there are a greater proportion of people now working in the gig economy, the full picture of the evidence of their pension eligibility is not very extensive. However, some interventions are likely to make a positive impact such as the removal of the band earnings which may help ‘gig economy’ savers to achieve a more adequate income in retirement. Furthermore, barriers for existing providers offering solutions to ‘gig economy’ workers are being better understood as time goes on, and these could act as a ‘template’ of sorts for both schemes and employers operating in this way.

94. There are specific evidential gaps which should be filled to benefit the development of future policies. These include further evidence on the ethnicity pensions gap, more modelling on the effects of increased contributions on investment into the green economy, infrastructure and socially positive initiatives and assessment of the effects of potential reforms on those retraining and/or younger workers (for example, apprentices) who, by virtue of their lack of sufficient earnings, may well not be eligible for AE.

AFFORDABILITY ACROSS A LIFETIME OF BOTH PENSION SAVING AND RETIREMENT

95. We are conscious of the current challenges to the workforce, including the long-term impacts of the pandemic, the current economic downturn and the real, hard impact of long-term weak wage growth and higher cost of living. Meanwhile, we are conscious of the crises of the future; not only those of inadequate retirement incomes, but wider factors beyond pensions that will also need to be addressed first, including the lack of access to emergency and other easy access saving, funding of social care costs and the feasibility or otherwise of working later in life.

96. We have therefore looked at these issues holistically, and are proposing working towards a new consensus on a roadmap for the medium term. The timeline for implementation would likely also benefit from further work to identify ‘hooks’ for changes and implementation, so that effective or actual increases in total pound contributions impact people’s take-home pay as little as possible, for example, by timing them to coincide with other policy change that impacts pay or benefits.

97. Our affordability protection principles mean that the system should be designed so automatic saving delivers:

1. Retirement income not materially higher than their working income (assuming a new, higher state pension)

2. Working life not spent in poverty, and/or;

3. Overall prosperity and living standards in retirement not negatively impacted (due to increased saving) that in turn reduces eligibility for state support.

As a result, we have sought to minimise affordability concerns by gradually increasing the proportion of income that people are saving through AE, through removal of the earnings limits, and cap this to a 1% total increase overall. Questions remain, however, for lower earners as our modelling shows that they risk achieving a higher income in retirement than their working income in many cases, even in the current situation without any further adjustments to AE (and therefore, breaching our first affordability protection principle). For further information please refer to our supporting research report. We are therefore also considering the introduction of other over saving protection mechanisms, such as temporary opt-down options, for lower earners in times of short-term financial hardship.

Measures for under pensioned groups

LEL

increase

removal

DISCUSSION QUESTION: WOULD YOU RECOMMEND ANY FURTHER PROPOSALS THAT SHOULD BE INCLUDED IN OUR POLICY FRAMEWORK THAT WOULD IMPROVE ADEQUACY FOR UNDER PENSIONED GROUPS?

6. DISCUSSION QUESTION: DO THE OBJECTIVES AND POLICY FRAMEWORK ENSURE A FAIR AND EQUITABLE OUTCOME?

AREAS FOR FURTHER EXAMINATION

£10K EARNINGS TRIGGER

98. The threshold trigger for AE is currently set at £10,000 and the Pensions Act 2008 requires a statutory review of the earnings trigger and band of earnings level. There is real value in both reforming and retaining the threshold trigger.

99. We find clear benefits for the £10k earnings trigger applying across total income and across multiple jobs rather than on a per job basis. Reform is required to ensure that the threshold trigger applies across multiple jobs. If an individual’s total income across multiple jobs surpassed £10k then they should be automatically enrolled. We would also recommend further research into the impacts on affordability for savers across their life in terms of the change in pension outcomes

100. There are benefits and drawbacks of adjustments to the £10k earnings trigger or retaining it at its current level. We do think there is a real benefit in retaining the trigger at a level where it protects lower earners from over saving if they are already likely to achieve a reasonable replacement rate and a poverty avoiding state pension, especially once the state pension is increased. Periodic assessments of the £10k earnings trigger already take account of different impacts of the change, for example the annual review in 2022 took account of both the participation effects (estimating around 17,000 more people saving into a workplace pension as a result of the freeze in the last review66), the total value of contribution effects (estimated to be £17m67). However, there are also interactions between in-retirement state support, the tax system and pension saving that, without resolution, are most likely to negatively impact those that have lower incomes during work, and lower balances of private pension saving at retirement.

SUMMARY OF THEORETICAL BENEFITS OF ADJUSTING THE £10K EARNINGS TRIGGER

Assessments of impact of freezing the £10k earnings trigger have show that more savers are brought into scope as minimum wage and earnings increase year on year (circa 100,000 per annum). Where the trigger could calibrated for overall improvement of outcomes it would also provide for a large increase in savers.

Lowering or removing the £10k earnings trigger altogether could help lower earners, including part time workers and multiple job holders, and therefore many women to trigger automatic enrolment rather than needing to opt in to pension saving.

Reducing the earnings trigger to the same level as the Lower Earnings Limit could be one way to ensure only those cur rently receiving National Insurance credits/paying National Insurance are automatically saving for a pension. At last estimates this would bring more than 1.2 million more people into retirement saving, many of whom are under pensioned groups.68 However, further work would need to be done to assess this effect in the round, as other estimates69 suggest that potentially only tens of thousands of people are paid less than or around the LEL level.

SUMMARY OF THEORETICAL DRAWBACKS OF ADJUSTING THE £10K EARNINGS TRIGGER

The current earnings trigger is a few hundred pounds higher than the current State Pension, and so is somewhat mitigating against the risk of over saving and becoming over pensioned for those with lower earnings throughout their working life.

To note that at the last review where the trigger was frozen, DWP noted that there is gradual real value reduction through earnings growth and inflation if it is retained at the same level.

Other mechanisms for change might be more nuanced; changing the trigger in isolation of review of other interactions is a blunt tool and it requires careful calibration.

The AE Trigger is already lower than the Primary Threshold for National Insurance and the Personal Income Tax Allowance which means people will be paying pension contributions even if they are not paying NI or tax, on income between the Lower Earnings Limit and the earnings trigger. Increasing the trigger to around these levels would decrease the number of savers in workplace pensions by an estimated 100,000 people.

https://www.gov.uk/government/publications/automatic-enrolment-review-of-the-earnings-trigger-and-qualifying-earnings-band-for-202223/ review-of-the-automatic-enrolment-earnings-trigger-and-qualifying-earnings-band-for-202223-supporting-analysis

https://www.gov.uk/government/publications/automatic-enrolment-review-of-the-earnings-trigger-and-qualifying-earnings-band-for-202223/ review-of-the-automatic-enrolment-earnings-trigger-and-qualifying-earnings-band-for-202223-supporting-analysis

For example, 15% of this group would be ethnic minorities, compared with 10% of the currently eligible workforce. DWP modelled estimates, 2017.

Based on DWP data, 2013.

TEMPORARY OPT DOWN AND PAUSE MECHANISMS

101. We believe there is also a case to reconsider whether temporary opt down or pause mechanisms may support people to manage their personal circumstances. There are currently barriers to schemes proactively offering temporary opt down (to the current default 8%) mechanisms, to protect savers from unscrupulous cost saving practices by employers. However, temporary opt down or pause mechanisms might help meet our affordability protection principles, particularly when paired with other interventions.

102. We believe the principles of temporary opt down or pauses in contributions in any system (whether it be required or voluntary) could follow certain principles. These could be, for example:

1. Minimum or default saving levels reduce from 12% down to a ‘floor’ of 8% for some lower earners, and;

2. After any temporary opt out period has elapsed the saver could be re-enrolled automatically to a ‘new’ pre-agreed, self-selected default rate (for example, 10% or 12%). However, it may also be worth considering, and potentially trialling, additional options or alternatives to the above, including but not limited to

The reduction in contribution reducing only the employee’s ‘take-home-pay’, Opt down to a lower ‘floor’ than 8%,

A re-enrolment period of between one and three years in contrast with a temporary pause only lasting a few months, Higher defaults and lower minimum levels of contributions, Offering the option only with the pre-approval to increase contributions at a later date, Offering the option only to those that exhibit vulnerabilities,

Designing an opt down model for the self-employed,

Complete pause on all contributions (both employer and employee) for temporary periods (e.g., shorter than the current three yearly re-enrolment period), and/or;

Assessment of effects when combined with other policies such as protected unmatched employer contributions and emergency side car savings.

COLLECTIVE DEFINED CONTRIBUTION

103. Collective Defined Contribution (CDC) has the potential to complement DB and DC schemes in specific circumstances. These schemes offer the same certainty of contributions as DC for employer and employee, but funds are then pooled between the scheme membership. This means there is a theoretical extended investment horizon, meaning savings can be kept in higher growth assets rather than being de-risked as a member approaches retirement as is the case with DC. As all contributions are pooled together, when a member retires the scheme pays them a regular ‘target’ income throughout retirement, similar to DB, although with provision for payment levels to be adjusted up or down to account for market performance.

104. CDC has already been implemented in other markets, including the Netherlands, and research over the last decade from the UK suggests it could improve adequacy (for those in DC) in the UK substantially, while presenting employers with a more affordable model than DB. PPI modelling from 2015 suggested that CDC might achieve a replacement rate of 27-30%, compared to DC which would only garner 12-21%, based on like-for-like 10% contributions, while modelling from the Government Actuary’s Department saw a theoretical uplift of 20-25% in returns compared to DC70,71. However, it is important to recognise that launching CDC schemes will entail overcoming some challenges, particularly regarding the communication of benefits and complex governance. While the potential for benefit payments to decrease can to some extent be mitigated through smoothing of returns, schemes will need to be very clear with members about this possibility. CDC schemes may not work well in circumstances when, as now, people have the ability and want to easily transfer their pots from one scheme to another after retirement.

105. Current UK regulation provides for single employer CDC schemes; these will naturally be limited to very large organisations, as the investment and longevity pooling on which CDC is based is dependent on scale. However, we will continue to work with industry and government as the potential for multi-employer, Master Trust, and decumulation-only CDC schemes is explored.

DECUMULATION AND GUIDED RETIREMENT INCOME CHOICES

106. Whilst most of this paper focuses on the how to improve adequacy through accumulation, it is also paramount that retirees are enabled to make best use of their savings when they come to accessing them. Since the Pension Freedoms, people have had more choice over how to do this, however the options are complex, and research shows people struggle to understand them. According to FCA data for 202172, half of drawdown withdrawals were at a rate of over 8%, which would see most people exhaust their pot before they die. Indeed, according to our own research in 2020, 71% of workplace savers want help to decide how to access their retirement savings73 .

107. It is no surprise navigating the retirement landscape is too complex for most individuals. As well as assessing their own needs and estimating their own longevity, various aspects of current legislation create pitfalls many don’t even know to avoid. For instance, we would like to see the removal of the Money Purchase Annual Allowance, which unfairly penalises pensioners who may need to work to supplement their income. Similarly, while the 25% tax free cash is one of the most engaged-with aspects of a pension, few are aware by withdrawing a small pot which could increase an individual’s wealth to over £10k, they may be reducing their eligibility for pension credit. Therefore, a large and growing gap exists in the support people need in the run-up to retirement with regard to the decisions they need to make about how to use their DC pensions, and as the shift from DB to DC continues, this gap will increase.

The PLSA’s proposed solution to this is our Guided Retirement Income Choices framework, which would place an obligation on those overseeing schemes to either provide – or signpost

members to – a suite of retirement products that would meet their needs. These products must inform customers as to their options, which should include both drawdown, providing flexibility of income, as well as the potential for a guaranteed income later in retirement. Throughout this year we have been consulting further with industry to establish what developments within the market are emerging to support savers, and as we discussed in our June report, we are encouraged by the number of Master Trusts and insurers seeking to help their members74. However there remain many schemes for which such solutions will not be an option, and so their savers are at risk of detriment, so we are working closely with DWP over the course of 2022, alongside their Call for Evidence, to help establish support on which all retirees can count75.

7. DISCUSSION QUESTION: DO YOU AGREE THAT THERE SHOULD BE FURTHER EXPLORATION OF ADDITIONAL MECHANISMS DESIGNED TO PROTECT FROM THE RISKS OF OVER SAVING AND BECOMING OVER PENSIONED AT HIGHER CONTRIBUTION LEVELS, SUCH AS ADJUSTMENTS TO THE £10K EARNINGS TRIGGER AND TEMPORARY OPT DOWN OR PAUSE MECHANISMS? SHOULD THERE ALSO BE FURTHER EXPLORATION OF INNOVATIONS, SUCH AS CDC AND GUIDED RETIREMENT INCOME CHOICES?

To conclude we therefore propose:

National objectives: The creation of clear national objectives for the UK pension system - ‘adequate, affordable and fair’ objectives - combined with regular formal monitoring of whether it is on track to achieve these goals; State pension: Reform of the state pension so that everyone achieves the Minimum Retirement Living Standard, to prevent pensioner poverty; AE reform: Reform AE to get more people saving (such as younger people, multiple job holders and gig economy workers) and at a higher contributions (by removing band earnings and gradually increasing contributions from 8% to 12% split evenly between employers and employees). This is so that people on median earnings are more likely to achieve the Pensions Commission’s Target Replacement Rates;

Under pensioned groups: Additional policy interventions to help under pensioned groups (including women, gig economy workers, self-employed people and others), and; Industry initiatives to achieve better pensions: Actions to help people engage with pensions, receive higher contributions, and get better pension outcomes.

There needs to be an agreed roadmap for achieving an enhanced UK pension system and these level and scope increases to AE.

There should be further research into potential changes to the £10 earnings trigger and the effective use of temporary opt down models and other mechanisms to protect from over saving where there is a risk of this occurring. We also need support for innovations, such as Collective Defined Contribution and Guided Retirement Income Choices, to make the most of DC saving.

THE INDUSTRY IS ALREADY ENCOURAGING SAVER ENGAGEMENT AND ADEQUATE CONTRIBUTIONS

109. Over recent years the pensions industry has worked to implement various initiatives, within the bounds of current legislation and regulation, to help people engage with pensions, receive higher contributions, or get better pension outcomes. Given these are typically focussed in particular areas of the industry, their individual impacts are moderate, however taken together, their cumulative impact is positive. Such initiatives can be categorised into the three themes.

Engagement Enhanced contributions

Efficient products and solutions

ENGAGEMENT INITIATIVES

110. As part of its recommendations, the AE Review 2017 called on the pensions industry, employers and wider government to work together to deliver better engagement with individuals on the benefits of workplace saving. The PLSA’s widely adopted Retirement Living Standards were designed to help savers picture their future, something that savers found difficult. Pensions Dashboards will be significant in progressing other industry efforts to find lost pensions, particularly, but also more generally lack of engagement with different pension pots. Engagement initiatives, such as green nudge trials, Simpler Annual Benefits Statements, the Pay your pension some attention campaign and efforts to engage women in pensions, are addressing a lack of awareness and understanding of pensions.

ENHANCED CONTRIBUTIONS

111. Industry has long worked to enhance contribution levels, including voluntary contributions. For example, the PLSA’s Pensions Quality Mark has championed excellence in employer provision, one component of the standard to achieve the quality mark being higher total contributions. Industry has also long shared experience and best practice on the best AE structures, such as employer matching and auto escalation. However, the industry has also undertaken to play its part in addressing wider systematic issues and inefficiencies, such as trying to identify small pots solutions76. Finally, industry has participated in trials, such as with the self-employed, to try and address the issue of chronic under saving amongst certain groups77.

EFFICIENT PRODUCTS AND SOLUTIONS

112. The industry is also always exploring more efficient products and solutions, such as CDC and Guided Retirement Income Choices, to help savers to avoid suboptimal decision making, loss of pensions, deliver greater risk sharing and collective purchasing power and other efforts to increase value for money. The Government should also continue to support industry product innovation (for example, sidecar saving and ISA-to-pension strategies).

HOW FAR CAN INDUSTRY INITIATIVES GO?

113. Many savers have benefitted from such initiatives and therefore the industry will continue to innovate and implement new ideas which will lead to improved pensions adequacy. However, we acknowledge that most of these measures will benefit some savers more than others, for instance, our Pensions Quality Mark will help savers within certain schemes, and Guided Retirement Income Choices will help those towards the end of their saving journey. In order to substantively improve adequacy universally across the UK, we believe reform must be tackled collaboratively by all parties. While it is incumbent on industry to innovate, legislation will need to enable some individuals and under-pensioned groups to benefit from industry efforts.

9. DISCUSSION QUESTION: WHAT ADDITIONAL STEPS CAN THE INDUSTRY TAKE UNILATERALLY TO IMPROVE ADEQUACY?

10. DISCUSSION QUESTION: WHICH INDUSTRY INITIATIVES ARE THE MOST EFFECTIVE TO ADDRESS INADEQUATE PENSION SAVING?

CONTEXT FOR CONSENSUS

SUMMARY

There is already consensus for gradual, phased extensions to the scope and level of AE as a result of the 2017 AE Review conclusions. We now must build a consensus for the next series of evolutions, including the timeline for increasing contributions to a high enough rate, and further scope increases, taking account of concerns where they arise.

There are wider issues that will also need to be solved for future retirees, on which we also need wider interventions. This includes the lack of emergency savings, the impact of Government interventions in long-term care and addressing the remaining difficulties of working later in life to support retirement income.

THERE IS ALREADY AGREEMENT THAT CHANGES TO AE ARE NEEDED

114. There is consensus that AE will not be sufficient to achieve an adequate income in retirement for many. Our new research adds to this evidence base, including establishing that wider sources of income will not make a significant difference on average. Recent social and economic shocks, including the pandemic and the cost-of-living crisis, have required sensitive and careful consideration; we must continue to balance the immediate income needs of savers now, against the future and long-term risks of vulnerabilities in the state and private pension system.

115. However, it’s now been five years since the PLSA first called on Government to:

Increase AE from 8% of band earnings to 12% of earnings by 2030, starting with increases from the mid-2020s, and;

Increase the scope of AE, including by redefining many gig economy workers as employees and piloting new solutions for the self-employed.

Others have also been calling for different interventions to improve pensions adequacy over the same period, including specific measures to address issues for women and lower earners.

116. It’s also five years since DWP’s 2017 AE Review concluded that the following changes should be made by the mid-2020s:

Lowering the age threshold for AE from 22 to 18, and;

Removing the lower earnings limit.

In this time since the Review no material changes have yet been made to evolve AE, and every year that passes is another year where the opportunity for improvement is missed. We have found widespread consensus for these measures.

117. There is growing consensus beyond the pensions industry that further changes to AE are needed. We have, and will continue to, engage with a broad spectrum of stakeholders. These range from business groups to trade unions and charities. On the whole, we have found that efforts to improve adequacy, through routes such as our proposals, have received widespread support.

118. Understandably, given the current economic environment, the business community may be concerned about the increased operating cost of these proposals, especially in the short term. Our proposals are not intended to be introduced immediately and without care to affordability, nevertheless, these concerns make building a consensus on the timeline for implementation all the more crucial.

119. The CBI/Mercer pensions survey of employers in 2021 found:

Businesses are committed to providing competitive workplace pensions and think they should pay more than the minimum where they can.

More than 4 in 5 (86%) senior executives who responded to the survey think there is a strong business case for providing a competitive workplace pension, with the same proportion believing that it is their moral obligation to do so to help employees save for retirement.

Businesses think that those who can afford it should improve retirement outcomes for employees and the vast majority choose to do so already.

More than 3 in 5 (65%) senior executives think that, where businesses can, they should pay more than the minimum statutory contribution into AE schemes to support employee’s retirement.

Improving the sufficiency of retirement income by building on the success of AE is a long-term objective businesses support

Three quarters (76%) of senior executives who responded to this survey think that higher aggregate contribution rates (above the current 8% statutory minimum) will be needed in the future to ensure that workers have sufficient levels of retirement income.

There is significantly more support for raising aggregate AE rates over a 5-year period (78%) than over the next 2 years (47%).

Two thirds (62%) of senior executives think a contribution increase in the next 5 years should apply to businesses. But a significant minority of businesses (35%) do not think that government should increase the statutory minimum contribution paid by employers at all in the next 5 years.

Three quarters (74%) of senior executives think businesses must do more to engage staff with pension saving. Over half (56%) of senior executives think that businesses should make guidance/advice available to staff as part of their pension scheme proposition.

120. As expected, those most concerned with individuals’ living standards in retirement are generally highly supportive. Consumer and employer groups continue to be very concerned about pensioner poverty, especially in the context of the current cost of living crisis. Many of our stakeholders support increasing contributions for those that can afford to do so. We have also found a lot of appetite to discuss potential small improvements to AE for those involved in pensions administration, HR functions and other in-employer pensions support.

121. The evidence in this report updates our best understanding of the impact of these and new additional reforms on future pension savers. DWP’s AE review conclusions, for which there is widespread support already, will improve outcomes for all income levels and across men and women. However, we find that these changes are not sufficient for improving outcomes across and between different groups, and so we also model increases to the state pension and increases to contributions.

122. Overall, we find that a package of component measures, including those for which there is already consensus, as well as new elements designed to address particular shortfalls, build on one another and evolve AE to take account of changes to the workforce we see today and for the future.

ISSUES OUTSIDE OF PENSIONS THAT MUST BE OVERCOME

WORKPLACE RAINY DAY AND EMERGENCY SAVING

123. Concerns remain about the financial resilience of much of the population, and significant proportion of the population do not have access to emergency savings.

The most recent official statistics find that 1 in 7 UK families report no savings78

In total 42% of the population have either no savings or less than £1,500 saved79 .

Of the most financially vulnerable in society 41% don’t have enough savings to live for a month without income80 .

For many people their automatic pension saving with therefore be the most significant amount of saving they have and will ever undertake. The importance of long-term saving does not diminish the significance of short term, emergency or ‘rainy day’ saving in building and maintaining financial resilience.

Sidecar saving

124. Sidecar saving accounts could reduce the need for short term credit and in doing so ensure more savers are retiring debt free and therefore able to use pension pots to maximise pension income. The sidecar saving mechanism could also act as an affordability mitigation for any increases in pension contributions if the increases are directed to building up “rainy day” funds first before contributions are directed to the pension. Savers that struggle in the short-term can then have the buffer of an emergency savings pot, which they can access where otherwise they might have ceased pension contributions (and likely not restarted them for several years). In Nest Insight’s early findings suggest that users are actively using and interacting with their sidecar, accounts despite the “set and forget” functionality; moreover, even after withdrawals the overall effect has been that savings balances increase on average over time81 .

78 https://www.gov.uk/government/statistics/family-resources-survey-financial-year-2020-to-2021/family-resources-survey-finan cial-year-2020-to-2021#savings-and-investment-1

79 https://www.gov.uk/government/statistics/family-resources-survey-financial-year-2020-to-2021/family-resources-survey-finan cial-year-2020-to-2021#savings-and-investment-1

80 Of MAPS target groups of the ‘financially struggling’ and ‘financially squeezed’ 41% had less than £499 saved. https://moneyandpensionsservice. org.uk/wp-content/uploads/2020/01/UK-Strategy-for-Financial-Wellbeing-2020-2030-Money-and-Pensions-Service.pdf

81 https://www.nestinsight.org.uk/themencode-pdf-viewer/?file=https://www.nestinsight.org.uk/wp-content/uploads/2021/07/Supporting-emer gency-saving-early-learnings-from-the-employee-experience.pdf#zoom=page-fit

Opt-out payroll saving

NEST CASE STUDY

Nest Insight82 trials found that employee sign up levels are low, even where people think that payroll saving with help them. In a new trial, ongoing, Nest Insight and employers are giving employees the choice to opt out of payroll saving and, where they don’t do so, automatically begin saving a default amount deducted from pay into an accessible emergency savings account83.

WORKING LATER IN LIFE

125. For those people who have not saved a sufficient amount into a pension and do not possess enough property wealth to make up the difference, working into later life could enable them to achieve their retirement income goals. However, for many people poor health, caring responsibilities or skills shortfalls are a barrier to staying in the workforce. (For more discussion of this issue, please refer to our sections on Under Pensioned groups). The available evidence, including our own and the Government’s, suggests that working later in life is unlikely to address the pensions inadequacy problems we have found84 .

126. Our previous Hitting the Target work consultation respondents highlighted the potential for flexible working arrangements and the importance of good guidance to help people balance work and other needs. They also drew attention to the CIPD’s ‘Age Diversity’ principles.

SOCIAL CARE

127. In September 2021 the Government announced changes to the funding for social care in England, including a new Health and Social Care Levy (which the current Government announced will not be implemented as a separate tax from 6 April 2023 as previously planned), a new £86k cap on the amount that anyone will have to spend on their personal care over a lifetime, an increase (from £23,250 to £100k) to the lower capital limit means test for accessing local authority funding to make this more generous, and; changes to move towards a ‘fair cost of care’, with adjustments in both the way that social care is arranged so that self-funders can benefit from lower local government rates, and increased funding to local governments so they can pay rates closer to the market rate.

82 Partners for this Programme are BlackRock, JP Morgan Chase & Co and the Money and Pensions Service.

83 https://www.nestinsight.org.uk/themencode-pdf-viewer/?file=https://www.nestinsight.org.uk/wp-content/uploads/2021/07/Supporting-emer gency-saving-early-learnings-from-the-employee-experience.pdf#zoom=page-fit

84 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/319948/fuller-working-lives-back ground-evidence.pdf

128. Government’s 2021 announcements to reform social care funding appear to go a long way to satisfy the PLSA’s four principles for the reform of social care85. These are:

Adequacy: proposals should not reduce pension income needed to support normal living costs;

Universality: the proposals should cover all or most of those in need of social care;

Fairness: the cost should fall on those who can afford to pay and protect those who cannot do so, and;

Affordable: they should be sustainable for the Exchequer.

129. These principles are important in the context of under pensioned groups, for example, and the intersectionality of lower in work pay and higher social care costs with the average cost of residential care for women aged 65-74 entering a care home was found by the Insuring Women’s Futures Committee to be £132,000, as compared with £82,000 for men86

130. We will remain interested in this debate as the realities and impact of the social care reforms become clearer. At the time of announcement we noted that we would examine the details especially given the debate about the fairness of the proposals will continue.

as part of

Hitting

IN CONCLUSION, WE’RE WORKING TO BUILD A NEW CONSENSUS FOR A FUTURE FRAMEWORK

SUMMARY

We have found that current pension saving is inadequate for many people. Of the working population87 who are currently saving into a Defined Contribution (DC) pension88 62% of DC Saving households and 63% of DC saving individuals will not achieve their Pensions Commission Replacement Rate. Future pensioner living standards are likely to come under significant pressure from a combination of factors including reduced overall wealth, higher costs and more years in retirement.

We therefore believe our new policy framework will significantly improve pension adequacy for the average worker in Britain as it will facilitate:

More people saving for a pension, including those currently outside of scope such as multiple job holders who are disproportionately women and other underpensioned groups;

More savers meeting all levels of Retirement Living Standards, and retirees more closely meeting their retirement income with their working income;

Prevention of pensioner poverty, by increasing the State Pension and optimising the interaction between private savings and in-retirement state support, and;

Increasing pension saving levels overall, mindful of the affordability of doing so by calibrating the design, level, structure and timing of changes to AE based on the best currently available evidence.

We want to build a consensus to achieve the pensions adequacy outcomes that savers need. This report therefore marks the launch of the next phase of our consensus building efforts. We have made recommendations on a new package of reforms, across five key elements.

131. Our intention is to enable more people, including younger people, lower earners and multiple job holders, to achieve an adequate income in retirement, address issues for women and other under pensioned groups, help everyone to benefit from an employer contribution, and avoid pensioner income crises.

‘working household’

‘DC saving household’

this context

this context

132. We wish the publication of our report to be a catalyst for consensus building, to evolve our collective thinking on a pensions framework for the current context, and to deliver a model that is future proofed. For this reason, this document marks the start of a period of consultation and discussion for all who have an interest in the future of the UK pensions system. We are encouraging engagement with us to take the debate forward.

WE WANT TO DEBATE BOTH THE PROBLEMS WITH THE CURRENT FRAMEWORK AND POTENTIAL SOLUTIONS TO FURTHER REFINE A NEW, PROPOSED FRAMEWORK

1. Do you agree with our findings on the current state of under saving?

2. Do you agree with our assessment of the drivers of under saving?

3. Do you agree with our proposed objectives for a new UK pensions framework?

4. Do you agree that the primary role of the state pension should be to protect all pensioners from poverty, and would you consider the minimum Retirement Living Standard a suitable measure of this level?

5. Would you recommend any further proposals that should be included in our policy framework that would improve adequacy for under pensioned groups?

6. Do the objectives and policy framework ensure a fair and equitable outcome?

7. Do you agree that there should be further exploration of additional mechanisms, such as adjustments to the £10k earnings trigger, temporary opt down or pause mechanisms designed to protect the risks of over saving and affordability of pension saving for lower earners, and other innovations such as CDC and guided Retirement Income Choices?

8. Do you think the timeline we propose for our overall package of recommendations could be implemented differently to have a bigger impact on improving pensions adequacy, and if so, how?

9. What additional steps can the industry take unilaterally to improve pensions adequacy?

10. Which industry initiatives are the most effective to address inadequate pension saving?

11. If no further action to improve pensions adequacy is taken, what other outcomes do you foresee?

133. Please contact us with us over the coming months to discuss and debate these questions. We ask the pensions industry, employers, business, savers and employee groups to engage with our discussion questions and events over the next period. We will look for input from all with an interest in pensions to support our further work.

134. We invite stakeholders to send their views on the questions above by 31 March 2023 to the following email address: fivesteps@plsa.co.uk

SUMMARY OF OUR RECOMMENDATIONS

Set new goals for the UK pensions framework, which should be adequate, affordable and fair

Set a state pension that ensures everyone in the UK has a minimum retirement income above an acceptable level

Summary of recommendations Increase the state pension over time to reach RLS minimum

Gradual removal of band earnings (ahead of other changes to reduce implementation complexity for employers)

Increase contributions to 12%, with gradual implementation of no faster than 0.5% a year Lower the qualifying age to 18

Further work should be done to automatically account for qualifying earnings threshold being met across multiple jobs

A broader, more detailed and more comprehensive evidence base taking account of intersectionality

Guidance for pension sharing on divorce Support HMRC nudges and Money Helper Mid Life MOTs for self employed

Reduce barriers for master trusts to offer pensions for the self employed Make it easier for trusted sources to discuss pensions with self-employed people Support industry product innovation (for example, sidecar saving)

Summary of next steps

Research interactions with non-state pension in retirement state support with these proposals (for example, removal of the Lower Earnings Limit) and other interventions (for example, the £10k earnings trigger) particularly for lower earners

Identify ‘hooks’ for increases so that they impact people’s take-home pay as little as possible

Further research into the effective use of temporary opt down models and other mechanisms to protect from over saving

Further consideration of the potential implementation of a family carer top up Exploratory research to better understand how self-employed people’s pension needs

Further consider the impact of adjusting the £10k earnings trigger (net of any future eligibility for state support)

Gather further evidence on the ethnicity pensions gap

Further research on the effect of reforms for those retraining and younger workers (for example, apprentices) Assess the impact of the proposals on different generations

More modelling on the effects of increased contributions on investment into the green economy, infrastructure and socially positive initiatives

Get more people saving into workplace pensions and at higher contribution levels

Help certain low income and otherwise under pensioned groups with additional measures

Make the very most of the current regime for pensions with additional initiatives by pension schemes, providers and employers

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