Australian-style pension targets needed

PLSA policy board chair Emma Douglas called for retirement income targets to encourage employees to boost their savings

Targets are needed to educate people about the lifestyle they could have when they retire so they save enough, according to Emma Douglas, the PLSA's policy board chair.

Speaking on day one of the PLSA Annual Conference and Exhibition 2018, Douglas said that only 23% of people think they know how much to save to ensure they have adequate income in retirement. Despite the success of auto-enrolment many people are still not saving enough, she warned, and “as an industry we’re not very good at giving simple answers to people on what they need to save”.

To help tackle this and encourage employees to save more, Douglas recommended that the UK adopt a model of retirement income targets so workers know how much to save to have the lifestyle they want in later life.

She referred to the Australian model of pension targets, which is broken down into three levels so people can see what they can look forward to. The three levels are: comfortable retirement, modest retirement, and age pension. She gave the example of the alcohol people can afford in Australia based on the three levels: bottled wine, box of wine and home brew respectively.

Pointing to PLSA research, Douglas said 74% of people think that retirement planning would be easier if they had retirement income targets; 70% said targets would encourage them to save more, with this rising to 78% among Millennials.

However, there is a risk low earners will find these targets unattainable, Douglas conceded.

“This is why we need three levels of retirement target as some levels aren’t realistic for some,” she said, adding that there is a need to think about the affordability of targets and to ensure the basic level isn’t much higher than state pension income.

“We wouldn’t want this to be unattainable for lower-income people as it should work across the board for everyone,” she said.

Gig workers and the self-employed could also be difficult to engage around targets, especially as there “isn’t an employer to incentivise them,” she said. “But targets can still work as these workers can look at the lifestyle they aspire to and what they need to save to get there.”

Douglas added that there’s a need to inform people about the reality they face, as “the information is depressing but it’s better to know it early than when you retire and can’t do anything about it”. Employers have a critical role to play, she continued, pointing to not only their part in pensions contributions but also their responsibility to provide employees with information on schemes.

Helen Dean, CEO of NEST, added that it’s important to build on the success of auto-enrolment to date.

“Auto-enrolment has been the success story of the past few years – it has been successful beyond all expectations,” she said. “Britain has started saving and that’s something to celebrate and be proud of, but it’s just the beginning.”

Employees who auto-enrol are unlikely to build on their savings on their own, she said, pointing to research that around a quarter of people auto-enrolled haven’t got any other savings.

“It’s notoriously difficult to engage people to save for retirement,” she said, as it requires a sort of “mental time-travelling”.

The PLSA aims to launch retirement income targets in 2019 as part of a timeline of recommended changes in the pensions industry to help ensure people will be comfortable later in life. Other plans include later-life diversity principles and gradual increases to the auto-enrolment minimum contributions.