The study, authored by leading economist Carl Emmerson, partner at London Economics, argues that the State Pension and workplace saving need to be considered together when assessing future retirement adequacy, because decisions about the future level and uprating of the State Pension will affect how much people need to save privately.
While triple lock reform would place future public finances on a more stable footing, the recently announced proposed change would make it harder for people to hit common pension adequacy benchmarks over the long term, as the State Pension will replace a lower proportion of pre-retirement earnings
For a £40,000 earner retiring at 63 and saving at the legal minimum level, Emmerson’s modelling suggests retirement income would replace around 62% of their previous take-home pay if the State Pension triple lock is maintained, falling to around 55% under a reformed triple lock, which would see the State Pension rise in line with earnings over time. Both are below a target of around 74% of take-home pay for such a median earner, sufficient to maintain living standards in retirement.
Automatic enrolment has been one of the UK’s public policy successes, but the report finds that middle earners are now the group where evidence of under-saving is strongest. Official estimates suggest around 40-50% of people in middle-earning groups are not on track to meet their target replacement rates under triple lock uprating and this figure will be higher under the reformed triple lock.
The findings reinforce the need for the second Pensions Commission to set out a target measure of retirement adequacy and propose the level of automatic enrolment contributions and threshold changes needed to achieve it.
However, policymakers need to think carefully about how to minimise negative impacts of higher universal contributions on lower earners, not all of whom can afford to save more. Under the reformed triple lock, the number at risk of saving more than they need for retirement would be smaller, but the risk would remain. The trade-off involved in raising pension contributions across a large and diverse population and how to mitigate the risk of people being nudged to save more than they can afford must be considered.
The report recommends:
Increasing default minimum automatic enrolment pension contributions.
Retaining a lower qualifying earnings threshold to protect lower earners from higher default contributions.
Provide employees with the option to opt down to the current minimum contribution rates.
Increasing the upper earnings threshold for automatic enrolment – the salary cap for minimum contributions – to around £65,000 and indexing it to earnings.
Modernising National Insurance credits to support part-time and part-year workers better, alongside considering mandating employer pension contributions from the first pound earned, including for employees who opt out of contributing themselves.
Carl Emmerson, Partner at London Economics and former Deputy Director of the Institute for Fiscal Studies, said: “Automatic enrolment transformed workplace pension saving and remains one of the UK’s most successful public policy reforms of the last twenty years. A challenge now is ensuring those employees brought into a workplace pension are contributing enough for their retirement.
“We cannot answer that challenge by looking at workplace saving alone. The State Pension provides the foundation for retirement income, and its future level and uprating will directly affect how much people need to save privately.
“Our new research shows that different groups face very different retirement challenges. Middle earners are where the evidence of under-saving is strongest, while policymakers need to be cautious about measures that could put further pressure on lower-income households today.”
Patrick Heath-Lay, Chief Executive Officer for People’s Pension, said: “The report makes a clear case for evolving the UK pensions system into a better integrated system where the state and workplace pensions combine to replace a target level of income in retirement. But if the state pension is to be held steady at 30% of median earnings then the case for increased private saving is strengthened.
“Policymakers should be cautious. There is a trade-off between the simplicity that has brought more than 11 million people into retirement saving via automatic enrolment and the need to protect lower earners from the impacts of higher contributions. Careful thought needs to be given to how to reduce risks for the lowest earners if a flat increase in contributions emerges as the Commission’s best option.”
Beyond automatic enrolment, the report argues that some of the biggest threats to future retirement adequacy sit outside the pensions system itself, including weak wage growth, rising housing costs, early labour-market exit and persistent labour-market inequalities. It concludes that lasting improvements in retirement outcomes will also depend on wider reforms to housing, labour markets and the economy.
Carl Emmerson and Patrick Heath-Lay will discuss the report’s findings at the Pensions UK Annual Conference on Tuesday 13 October.
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