Hitting the Target
George Currie, Senior Policy Adviser at the PLSA, explains why we’re promoting a flagship proposal on Retirement Income Targets.
The PLSA has launched a new consultation – Hitting the Target – to explore how changes in policy, regulation and industry practices could improve retirement outcomes for future generations. Despite recent policy successes, which have led to more people than ever saving for later life, future pensioners face a number of pressures on their retirement income.
Younger savers are not accumulating pension and property assets at the same rate as previous generations, which is likely to affect the amount of income they will have at their disposal in retirement. Current trends also suggest that younger people are likely to face higher costs in retirement than today’s retirees. Longer life expectancies and the associated care needs, as well as a higher likelihood of paying housing costs (rent or mortgage debt), could add substantially to younger savers’ expenditure when they retire.
Historically low savings rates combined with falling property ownership and higher living costs in later life mean that there is a real risk that millions of people could be disappointed with their quality of life in retirement. Indeed, in 2016, the PLSA found that 13.6 million workers are at high risk of failing to achieve an adequate income in later life.1In order to help more people achieve the income they want in retirement, the PLSA believes that reform is required right across the pensions and lifetime savings universe.
Our consultation makes proposals in the areas of automatic enrolment, pension tax relief, equity release, pension fund property investment, longer working lives, pension scheme governance, value for money, the decumulation process, and engagement. However, our flagship proposal recommends the creation of a new set of Retirement Income Targets (RITs), which savers in the UK could use to assess how far they are on their journey to the retirement that they desire.
LESSONS FROM AUSTRALIA
The idea of RITs is not entirely new. In 2004, the Association of Superannuation Funds of Australia (ASFA) introduced the ‘Retirement Standard’. It was developed in order to help people plan for retirement, given that research suggested that many people struggle when it comes to developing a budget for their future needs – especially when their retirement is many years away.
The ASFA Standard does this by outlining three distinct income levels, as well as the sorts of goods that can be purchased with each: the first is tied to the Australian State Pension; the second and third identify the sort of goods and services that can be purchased with a ‘modest’ and ‘comfortable’ retirement income. For the ‘modest’ and ‘comfortable’ levels, ASFA has constructed estimates of the annual budgets required by individuals to fund the chosen standard of living in later life.
The ASFA benchmarks estimate the budgets required by both singles and couples in order to enjoy a ‘comfortable’ and ‘modest’ standard of living in retirement. They are updated quarterly to reflect changes to the Consumer Price Index (CPI) and comprehensively reassessed on a periodic basis to ensure that the right goods and services are included. The ASFA targets also differentiate between older and younger retirees, who often have different needs that require appropriate funding. For each retirement standard, a basket of goods is constructed based on expert opinion, national surveys of expenditure and focus groups.
The ASFA approach has been hailed as “ground breaking”, on the basis that it gives Australians “a tangible savings target with a clear idea of what type of lifestyle that amount of money can give them in retirement.”2 The targets that have been developed by ASFA play an important role in helping Australian savers to plan effectively for the lifestyle that they would like to enjoy in retirement.
UK TARGETS: UNDERSTANDING SAVERS’ NEEDS
Low retirement savings levels in the UK are the result of a variety of factors that have combined to restrict the amount that people set aside each month. Economic pressures are clearly significant, with many savers finding it difficult to balance short- and long-term needs. Perhaps as important is the automatic enrolment minimum, which savers all too often take as shorthand for ‘enough’.
However, a big part of the savings problem is that savers are not clear about the level of income that they will need in retirement; indeed recent research shows that 77% of people have no idea how much they will need. Of the 23% who claim to know how much they will need in later life, only 16% are able to provide an exact value.
By offering savers clarity about the costs they will need to meet in later life, the RITs that the PLSA is proposing could play a crucial role in encouraging people to save accordingly. Giving savers a clear idea of the amount of money that they will need in order to enjoy their desired lifestyle will also help them to plan how they intend to achieve that income – be it via pension savings, property assets, working longer or a combination of all of these.
Polling commissioned by the PLSA demonstrates that this is a popular idea! According to our research, 80% of people believe that having a series of de ned targets would be a helpful aid to retirement planning; and, moreover, 80% believe that a set of RITs for the UK should be developed. Savers really do want to have a clear sense of the amount of retirement income they should be targeting.
HOW MUCH IS ENOUGH?
As part of our research for the Hitting the Target consultation, we identified three potential income levels – ‘minimum’, ‘modest’ and ‘comfortable’ – and asked savers how much they believed they would need to meet each of these targets.
As expected, many stated that they were unable to identify an appropriate amount for any of these levels. However, for those savers approaching retirement and, as a result, strongly considering how much they will need in retirement, £10,000 was most commonly cited as the level of income required for an individual to achieve a ‘minimum’ standard of living. Moreover, for the ‘modest’ and ‘comfortable’ standards, these savers cited £10,000-£15,000 and £15,000- £20,000 most commonly as appropriate individual income levels.
The consumer group Which? has carried out similar research. It surveyed its retired members in an effort to ascertain how much money they believe is required to enjoy retirement. The survey identified two lifestyle types: ‘comfortable’ and ‘luxury’. Which? found that for a couple to have a ‘comfortable’ lifestyle they would require an annual income of £26,000, and for a luxury lifestyle £39,000. The key drivers behind a luxury lifestyle were extended holidays, leisure club membership and driving a fairly new car.
It is clear that more work is required to identify a series of widely accepted income levels that savers feel are at once achievable and reflect their expectations of life in retirement. The PLSA will be carrying out further research in this area in 2018. By helping savers to think about their later life income needs earlier in life, we believe that RITs can play a crucial role in enabling people to make the most of their retirement. At the PLSA’s Annual Conference 2017, Martin Fahy, Chief Executive of ASFA, encouraged the UK to adopt the target approach, telling delegates that “The presence of a target means that we can have a national conversation about what retirement will feel like for people.”
With the launch of our Hitting the Target consultation, we hope that we have fired the starting gun on this conversation in the UK.
1 PLSA, Retirement Income Adequacy: Generation By Generation (2016)