Things are not looking rosy for future DC retirees – education and guidance is more important than ever

Earlier this year, the Association of Consulting Actuaries (ACA) published its final report on the results of their 2021 annual Pension Trends Survey, which included responses from randomly selected 212 companies of various sizes sponsoring over 400 pension schemes. The results highlight the importance of addressing a range of challenges to reaching an adequate level of pensions savings in the current environment, with particular focus on participation in workplace pension and the level of contribution to those arrangements.

ACA highlights that the findings support their call for urgency on overdue pension reforms, warning about the approaching retirement income adequacy crisis.

While Automatic Enrolment (AE), with its “nudge” economics, has been undoubtedly successful in bringing 10.6 million workers into workplace savings by November 2021, with the opt-out rate of less than 10%, there are well founded concerns that it has also created a misleading sense of security amongst many savers, who might end up disappointed about their level of income in retirement.

ACA’s previous research suggested that even savers on median incomes, who contribute at the AE minimum level, are likely to achieve a replacement ratio of around 40%, including State Pension. The rate required to secure a ratio of around 60% comes to an average of 16% of salaries throughout their lifetime. The present contribution level of 8% of Qualifying Earnings equates to closer to 4% of total earnings for those on lower incomes and is likely to be inadequate for many savers.

Some of the key findings of the survey indicate that:

• employers are generally supportive of increasing the minimum AE contribution to 12% of total earnings, of which 6% is paid by employees. However, most of them recognise it is highly unlikely to happen during this Parliament, with the introduction of the Health and Social Care Levy. We should also look at this in the context of general pressures on costs of living recently.
• the rate of employers seeing increases in opt-out rates nearly doubled because of COVID-19, from 11% in the pre-pandemic environment, to 20% more recently. The key drivers for that trend are likely to be due to either an unwillingness or inability to afford contributions due to the economic consequences of the pandemic, in terms of both lower pay and employment levels in firms of all sizes; and
• 67% of employers (up from 47% in the previous survey) would like to be able to pay their contributions into more flexible savings vehicle, which could be used for retirement savings as well as other purposes, such as house purchase, with the right safeguards (which appears to be counterintuitive to the arguments in favour of CDC).

The survey also points to an encouraging trend in employers’ efforts in doing more for their employees to help them understand their retirement spending needs, with more offering access to independent advice. Such advice is often focused on “at-retirement” decision making, rather than in the accumulation phase.

However, if savers are to make informed decisions about the levels of contributions they need to make to target a certain income level in retirement, it is important they receive regular, multi-layered education and guidance early on during the accumulation phase, as well as at regular intervals through their membership lifecycle. Interactive planning tools can add a lot of value to such programmes, especially when they integrate modellers that help members to understand factors affecting their retirement spending needs, as well as the purchasing power of their income.

This is where those who manage pension schemes should work closely with employers, to make sure that members are consistently supported in the ways that will help them achieve the best possible outcomes in retirement.