Articles - Can we move more people to pension adequacy

For many actuaries involved in delivering sustainable defined benefit pensions the question of adequacy isn’t a major consideration. Employers offering defined benefits pension schemes are providing a pension that delivers an income in retirement that members can afford to live on, so long as people remain in the pension scheme for a significant period of time. But as we know, not everyone is lucky enough to be provided with a pension scheme that invests such a significant proportion of their income for the future.

 By Dale Critchley, Policy Manager, Aviva

 For many workers in the UK, and in particular those working for smaller employers, and in industries where labour costs are more critical to maintaining a competitive edge, the automatic enrolment minimum contribution rate is standard.

 You don’t need to be an actuary to work out that a scheme investing 8% of qualifying earnings won’t provide anywhere near the level of pension provided by a defined benefit pension scheme investing in excess of 20% of workers’ salaries. But how do we get to a position where employers and employees commit to contribution levels that deliver an adequate income for a bigger percentage of the population?

 The government never intended 8% of qualifying earnings to be the pensions equivalent of our ‘5-a-day’. It was always intended to be a foundation. But in the absence of an alternative benchmark it’s difficult for employers and employees to judge whether their scheme will provide at least a minimum level of income when individuals retire.

 It’s this benchmark that Aviva have been working on with the Resolution Foundation.

 The concept is simple. Many employers in the UK already commit to paying their employees the Real Living Wage promoted by the Living Wage Foundation. This is a pledge to pay a wage that people can afford to live on while they’re working. We wondered if we could take the same concept and apply it to pensions, enabling employers to commit to providing a Living Pension scheme. A pension scheme that’s designed to provide employees with at least a minimum income in retirement. The Living Pension would provide an alternative benchmark to the Government’s 8% of qualifying earnings.

 As you’ll appreciate, this is easier said than done. The Resolution Foundation have done some terrific work. They’ve arrived at a minimum income requirement which when averaged out is very close to the PLSA’s minimum figure. What’s interesting though, is the difference in income required by renters compared to homeowners. Renters need almost 50% greater income to maintain a decent living standard.

 When it comes to how much needs to be paid into a DC pension, the complexity is compounded. The report shows that a large proportion of the UK population, especially those on lower incomes, have little pre-automatic enrolment pension wealth. These people are playing catch up.

 It seems inevitable that arriving at a target contribution for DC pensions which is similar to the Living Wage, is going to involve compromise. We will need to strike a balance between achieving simplicity and understanding on the one hand and getting it right for every cohort on the other.

 I think it can be done. We can come up with an easy to understand Living Pension accreditation for employers. It won’t mean that every employee who works for that employer will have a decent pension - we can’t, for example, turn back the clock for those who haven’t accrued any pension and are close to retirement. But if we can get a critical mass of employers to commit to a providing a Living Pension scheme, we can ensure that contributions are maintained at a reasonable level from one employer to the next, and for a bigger percentage of the UK population. We can consign 8% of qualifying earnings to history, introduce a much healthier ‘5-a-day’ for pensions, and ensure that more people in the UK accrue a pension that’s adequate to live on.

 I think that’s worth working on.

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