Living standards in later life - Discussing pension adequacy

One of the key goals of the Pensions Commission, published almost two decades ago, was to reform pension saving so that more people were encouraged to save enough for a decent income in retirement. The main policy recommendation of the Commission – auto-enrolment – has been rolled out and ramped up since then, and in doing so has completely transformed the savings landscape across Britain. But is it meeting the key goal of boosting pensions adequacy?

How much do people need to save for a decent income in retirement, and how does it vary across the income distribution? How have the pensions adequacy targets suggested by the Pensions Commission back in 2006 been affected by policy and economic changes since then – from taxes and the triple lock, to interest rates and annuities? Are people saving enough for their retirement now? And what does that mean for the new Government’s pensions review?

The Resolution Foundation is hosting an in-person and interactive webinar to debate and answer these questions. Following a presentation of the key highlights from new research – funded by the People’s Pension – on pensions adequacy, we will hear from leading experts – including the Chair of the Pensions Commission Lord Turner – on whether auto-enrolment is delivering in terms of securing decent retirement incomes for workers, and where the policy might go next.

1. October 24 @resfoundation Living standards in later life Are auto-enrolled workers saving enough for their retirement? Lord Adair Turner , Economist and Former Chair of the Pensions Commission Molly Broome , Economist, Resolution Foundation Chair: Lord David Willetts , President of the Resolution Foundation

2. 2 The Pensions Commission revolutionised pension saving @resfoundation

3. 3 Possible derivation of the Pensions Commission’s target replacement rate for a median earner: 2002-03 Notes: Our modelling uses £21,250 for median earners in 2002-03. Source: RF analysis of Pensions Commission, Pensions: Challenges and Choices: The First Report of the Pensions Commission; ONS, Annual Survey of Hours and Earnings. @ resfoundation The Commission proposed a target replacement rate of 67%

4. 4 The Pensions Commission’s target replacement rate for a median earner in 2024-25 Notes: Our modelling uses £36,985 for median earners in 2024, based on April 2023 earnings adjusted to April 2024 levels using earnings growth. Source: RF analysis of ONS, Annual Survey of Hours and Earnings. @resfoundation 72% is the new 67%

5. 5 The Pensions Commission’s target replacement rates in 2002-03 and their equivalent in 2024-25, by earnings band Notes: Our modelling uses £17,700 for low earners, £25,150 for lower-middle earners, £36,985 for median earners, £60,600 for upper-middle earners and £74,600 for high earners. These represent the earnings bands from the Pensions Commission’s first report, uprated to April 2024 using earnings growth. Source: Resolution Foundation analysis. @resfoundation Tax changes have increased TRRs more for lower earners

6. 6 Target pension income as a percentage of earnings for the median earner at the point of retirement, as envisioned by the Pensions Commission Today, policy is set to replace 51% of median earnings. Source: Figure 6.33 in Pensions Commission, A New Pension Settlement for the Twenty-First Century. @resfoundation At least 45 percentage points was to come through policy

7. 7 Gross income replacement rates from the State Pension and auto-enrolment versus updated target replacement rates, by earnings band: 2024-25 Notes: Our modelling uses £17,700 for low earners, £25,150 for lower-middle earners, £36,985 for median earners, £60,600 for upper-middle earners and £74,600 for high earners. See report for full chart notes. Source: RF analysis of Bank of England, Yield curves; The Annuity Project from William Burrows; The Pensions Commission, A New Pension Settlement for the Twenty-First Century: The Second Report of the Pensions Commission; ONS, Annual Survey of Hours and Earnings; OBR, Economic and fiscal outlook – March 2024. @resfoundation A one size fits all policy leaves higher earners short of target

8. 8 Should policy do more to boost pension saving? @resfoundation

9. 9 Gross annual labour income of full-time employees before retirement versus gross annual income after retirement: UK, 2005 to 2015 Notes: Financial values adjusted to April 2024 prices using CPIH index. Gross annual income data variables are the average of two or three years of data depending on availability. Labour income for those that are full-time employees in the year before retirement. The 10-year period after the Pensions Commission is based on BHPS wave 15 to Understanding Society wave 5. Source: RF analysis of ISER, British Household Panel Survey and Understanding Society; ONS, CPIH Index. @resfoundation 1. Most retirees have replacement rates less than target

10. 10 Disposable wealth of full-time employees on median earnings versus modelled target wealth to be on track for a 72 per cent target replacement rate, by age group: GB, 2018-20 Notes: Financial values adjusted to April 2024 prices using the CPIH index. Median earnings are approximated by taking the range of £32,600 to £46,599. Disposable wealth includes net financial wealth, other property wealth and pension wealth. Disposable wealth holdings for full-time employees aged 60-64 has been interpolated by increasing wealth in line with the change for the whole population. See report for full chart notes. Source: RF analysis of ONS, Wealth and Assets Survey. @resfoundation 2. People often have other financial resources to draw on

11. 11 Disposable wealth of full-time employees on median earnings versus modelled target wealth to be on track for a 72 per cent target replacement rate, by age group: GB, 2018-20 Notes: Financial values adjusted to April 2024 prices using the CPIH index. Median earnings are approximated by taking the range of £32,600 to £46,599. Disposable wealth includes net financial wealth, other property wealth and pension wealth. Disposable wealth holdings for full-time employees aged 60-64 has been interpolated by increasing wealth in line with the change for the whole population. See report for full chart notes. Source: RF analysis of ONS, Wealth and Assets Survey. @resfoundation 2. People often have other financial resources to draw on

12. 12 Proportion of the working-age population living in families with savings below a given threshold, by income tertile : GB, 2018-20 Notes: Savings and income measured at the benefit unit level. Savings defined as current accounts in credit, value of savings account, value of ISAs and value of national savings products. Savings thresholds are cumulative, for instance, savings of less than £1,000 also includes those with savings of less than £100. Source: Analysis of ONS, Wealth and Assets Survey. @resfoundation 3 . Millions of families don’t have enough precautionary savings

13. Clarify the purpose of auto-enrolment. Explore introducing more flexibility and accessibility. Articulate the state’s role in helping households manage risk and uncertainty in pensions. 13 Key issues for the Government’s pensions review @resfoundation

14. October 24 @resfoundation Living standards in later life Are auto-enrolled workers saving enough for their retirement? Lord Adair Turner , Economist and Former Chair of the Pensions Commission Molly Broome , Economist, Resolution Foundation Chair: Lord David Willetts , President of the Resolution Foundation

15. 15 Final salary and average salary replacement rate under today’s auto-enrolment system, by earnings group: 2024-25 Notes: Our modelling uses £17,700 for low earners, £25,150 for lower-middle earners, £36,985 for median earners, £60,600 for upper-middle earners and £74,600 for high earners. Source: RF analysis of Bank of England, Yield curves; The Annuity Project from William Burrows; The Pensions Commission, A New Pension Settlement for the Twenty-First Century: The Second Report of the Pensions Commission; ONS, Annual Survey of Hours and Earnings; OBR, Economic and fiscal outlook – March 2024. @resfoundation Targeting average earnings would smooth consumption better