PPI PENSIONS POLICY INSTITUTE PPI Policy Seminar What level of - - PowerPoint PPT Presentation

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Association of British Insurers 22 October 2013

PPI Policy Seminar What level of pension contribution is needed to obtain an adequate retirement income?

PPI

Chris Curry, PPI Director Pensions Policy Institute 22 October 2013 www.pensionspolicyinstitute.org.uk

What level of pension contribution is needed to

• btain an adequate

retirement income?

PPI

We’d like to thank...

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PPI

What level of pension contribution is needed to

• btain an adequate

retirement income?

• Adequacy of retirement income
• How often could minimum contributions

result in an adequate retirement income?

• What contribution rate would be necessary to

achieve an adequate retirement income?

• Is there an adequacy gap?

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PPI

Adequacy of retirement income

• Adequacy can be defined as to what

extent individuals have a retirement income that:

• allows them to fulfil basic needs
• allows them to replicate their pre-

retirement living standards

• Replacement rates are a useful measure if

the second definition is peferred

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PPI

Adequacy and automatic enrolment

• Automatic enrolment into workplace

pensions fully rolled out by 2018

• Employees likely to be enrolled into a DC

pension

• Different factors affect retirement income

from DC pensions:

• Contribution level and their persistency
• Investment returns
• Charges

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PPI

What level of pension contribution is needed to

• btain an adequate

retirement income?

• Adequacy of retirement income
• How often could minimum contributions

result in an adequate retirement income?

• What contribution rate would be necessary to

achieve an adequate retirement income?

• Is there an adequacy gap?

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PPI

Retirement income from private and state pensions is uncertain

Probability of retirement incomes from state and private pensions at SPA for a median earner that starts saving at age 22, retires at SPA and follows a traditional lifestyle investment approach, if contributing at 8% of band earnings

PPI

The probability of achieving the target replacement income varies by earnings level

Probability of achieving the target replacement income with income from private and state pensions for different individuals, if starting to save at age 22, retire at SPA follow a traditional lifestyle investment approach and contributing at the minimum total 8% of band earnings

PPI

Adequacy is much harder to achieve if the single-tier state pension is not triple locked but earnings linked

63% 49% 40% 36% 30% 28% Lower earner Median earner Higher earner 0% 10% 20% 30% 40% 50% 60% 70% Triple locked Earnings linked Probability of achieving the target replacement income for different individuals with income from private and state pensions, if they start saving at age 22, retire at SPA, follow a traditional lifestyle investment approach and contribute at 8% of band earnings, under different indexation rules for the single-tier state pension

PPI

What level of pension contribution is needed to

• btain an adequate

retirement income?

• Adequacy of retirement income
• How often could minimum contributions

result in an adequate retirement income?

• What contribution rate would be necessary to

achieve an adequate retirement income?

• Is there an adequacy gap?

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PPI

The required contribution rate for a good chance of reaching a target replacement income increases with earnings

Contribution rates needed for different individuals to reach a 66% or 75% probability of achieving their target replacement income, if they start saving at age 22, retire at SPA and follow a traditional lifestyle investment approach. Single-tier state pension triple locked

9% 11% 12% 11% 13% 14%

Lower earner Median earner Higher earner

0% 2% 4% 6% 8% 10% 12% 14% 16%

Two-thirds Three-quarters

Total contribution rate (% of band earnings)

PPI

Lower indexation of the state pension increases the required contribution rate

Contribution rates needed for different individuals to reach a 66% or 75% probability of achieving their target replacement income, if they start saving at age 22, retire at SPA and follow a traditional lifestyle investment approach. Single-tier state pension earnings linked

13% 14% 15% 15% 17% 17% Lower earner Median earner Higher earner 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Two-thirds Three-quarters

Total contribution rate (% of band earnings)

PPI

Different factors affect the minimum contribution rate to have an adequate retirement income

Single-tier triple locked Single-tier earnings linked Probability of achieving the target replacement income Investment approach AMC: 0.5% AMC: 1% AMC: 0.5% AMC: 1% Two-thirds Traditional lifestyle 11% 12% 14% 16% First alternative 12% 14% 16% 17% Second alternative 10% 12% 14% 15%

PPI

Different factors affect the minimum contribution rate to have an adequate retirement income

Single-tier triple locked Single-tier earnings linked Probability of achieving the target replacement income Investment approach AMC: 0.5% AMC: 1% AMC: 0.5% AMC: 1% Two-thirds Traditional lifestyle 11% 12% 14% 16% First alternative 12% 14% 16% 17% Second alternative 10% 12% 14% 15%

PPI

Different factors affect the minimum contribution rate to have an adequate retirement income

Single-tier triple locked Single-tier earnings linked Probability of achieving the target replacement income Investment approach AMC: 0.5% AMC: 1% AMC: 0.5% AMC: 1% Two-thirds Traditional lifestyle 11% 12% 14% 16% First alternative 12% 14% 16% 17% Second alternative 10% 12% 14% 15%

PPI

Different factors affect the minimum contribution rate to have an adequate retirement income

Single-tier triple locked Single-tier earnings linked Probability of achieving the target replacement income Investment approach AMC: 0.5% AMC: 1% AMC: 0.5% AMC: 1% Two-thirds Traditional lifestyle 11% 12% 14% 16% First alternative 12% 14% 16% 17% Second alternative 10% 12% 14% 15%

PPI

Different contribution patterns affect the necessary contribution rate to have a two-thirds chance

• f achieving a target replacement

income

11% 14% 23% 9% 14% 18% 27% 13%

Baseline (starts saving at age 22; retires at SPA) Career break (starts saving at age 22; retires at SPA) Starts saving at age 40; retires at SPA Starts saving at age 22; retires two years after SPA

0% 5% 10% 15% 20% 25% 30%

Single-tier triple locked Single-tier earnings linked

Total contribution rate (% of band earnings)

Contribution rates needed for a median earner to reach a 66% probability of achieving their target replacement income with income from private and state pensions, if they follow a lifestyle investment approach, under different contribution scenarios and mechanisms to uprate the single-tier state pension

PPI

What level of pension contribution is needed to

• btain an adequate

retirement income?

• Adequacy of retirement income
• How often could minimum contributions

result in an adequate retirement income?

• What contribution rate would be necessary to

achieve an adequate retirement income?

• Is there an adequacy gap?

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PPI

Is there an adequacy gap?

• Many individuals may need to contribute more

than the legal minimum and a number of strategies could be considered

• Information and advice
• Incentives
• Increasing minimum contribution rates
• Auto-escalation
• Compulsion?
• Other types of wealth
• Working longer

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PPI

Issues for discussion

• Will saving at the legal minimum be

enough to have an adequate retirement income?

• What should the minimum contribution

be, taking into account the variations in earnings, the impact of starting to save later in life, taking career breaks or working longer?

• What can individuals and the

Government do to increase savings into workplace pensions?

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