More people than ever are saving towards their pension, but it’s hard for them to engage with how much their retirement could cost. Mark Smith explains how the PLSA’s new Retirement Living Standards will help.
Thanks to automatic enrolment, more than 10 million people with no previous pension savings are putting money away for the future. There is no doubting the success of the policy. It has harnessed pension inertia and set the years of compounding employer and saver contributions, tax relief and investment growth train in motion for millions of people.
But the pensions landscape continues to evolve and we need to respond to a growing need to engage savers. Savings can now commence with a low level of engagement at the outset. There are also now even more options about how to spend pensions savings at the point of retirement. And savers need to consider early on what sort of outcome they want from their retirement.
It’s hard to picture future needs today
Many people are unable to balance current financial needs with future financial needs. According to PLSA research, 51% of people focus on their current needs and wants, at the expense of providing for the future. Only 23% of people are confident they know how much they need to save for retirement.
Our research also shows that understanding how much money people need in retirement, and how it compares with their lives now, would help them engage more with pension savings.
But working out the exact amount people need is tricky. We all have different ideas about what we want from retirement and no two people’s lives are the same.
For years the pensions industry has focused on the Pensions Commission’s target replacement ratio – an estimated proportion of your current income that you aim to generate in retirement – as a guide.
However, for many people the concept is hard to grasp, too rooted in financial detail and doesn’t give them a tangible sense of the future lifestyle their savings will likely provide.
Making it relatable
That is why we have developed a simple set of Retirement Living Standards that enable people to mentally time travel – to visualise a future lifestyle and start thinking about what their saving might need to achieve.
The Standards establish three levels of retirement lifestyle: minimum, moderate and comfortable, to provide three points of focus for discussion and the first step of engagement and understanding.
For each level there is a basket of goods and services, and their costs: household bills, food and drink, transport, holidays and leisure, clothing, helping others. This is not a prescriptive definition of what individuals should aim for, but an illustration of the kind of lifestyle each Standard could offer.
The great thing about this system is that people can think practically about the kind of lifestyle they might want in retirement and whether they are on track to achieve it. The Retirement Living Standards will fill the gaps in current approaches and act as a practical and meaningful starting point on a saver’s engagement journey.
Realistic and relevant
The Standards are based on independent research with the British public, which goes well beyond a simple survey. Researchers at the Centre for Research into Social Policy at Loughborough University formed focus groups of retired and non-retired people. Two hundred and fifty people held over 60 hours of discussions at sites all over the UK.
They were asked to describe and define what ‘higher’ living standards above the given Minimum Income Standard meant, and to develop key descriptors for each standard. They then were asked to imagine what an individual would need for that standard, to establish the basket of goods. This was developed iteratively, and then the final basket of goods was costed up to arrive at the RLS figures.
How will retirement living standards be used?
Goal-setting can greatly assist people in planning, and a series of simple standards could transform pensions engagement. Nearly three-quarters (74%) of people believe that retirement living standards would make it easier to plan for retirement and 70% of people believe that income targets would encourage them to save more for retirement. Industry participants and consumer groups such as Age UK who gave feedback during our 2017-2018 Hitting the Target public consultation agreed universally.
Neuroscientific and behavioural studies have shown that imagining personal future events or ‘mental time travelling’ can help to reduce the human tendency to undervalue future rewards. This suggests that developing retirement standards that are relatable to an individual and help them picture future events may be beneficial.
The Standards are a key step on the journey to engagement. They respond to what we have heard about saver needs and plug the gaps in the public debate.
Our ambition is for the Retirement Living Standards to become a widely adopted industry standard to help people engage with their retirement savings. By 2025, we want to see 90% of active savers belonging to pension schemes that are using the Standards. Like the ‘five a day’ healthy eating maxim, we are aiming for the Standards to one day become a rule of thumb for retirement planning.
There are a number of existing tools that let users work out what income they may be able to draw from their pension when they retire. These are a fantastic starting point for people to understand the pounds and pence they will have to spend. What they don’t do yet, and where we think the Retirement Living Standards will be invaluable, is relate expenditure to a tangible lifestyle. That would help people understand if they are on track, and potentially provide the impetus for them to save a bit more into their pension if they see a shortfall in being able to afford an annual overseas holiday, for instance.
We are working closely with industry to ensure pension schemes incorporate the Standards into the full range of their communications, including annual benefits statements, videos, online calculators, pensions engagement tools and workplace communications.
We are also working hard to ensure the Retirement Living Standards are used by the Money and Pension Service and, in due course, included on pension dashboards.
The Standards will support better saver engagement. They distil robust and complicated modelling into easy-to-understand and relatable figures that can provide a powerful and immediate imperative for encouraging healthier savings habits. They will go a long way to help everyone achieve a better income in retirement.