New government figures show the level of undersaving in British pensions is still substantial, despite increased pension participation in the private sector.

‘Analysis of future pension incomes’, published by the Department for Work and Pensions (DWP), updates figures from an auto-enrolment review in 2017 with a new estimate of the number and proportion of working-age individuals aged 22 to state pension age who are not saving enough for their retirement.

The new report – covering England, Scotland and Wales – is intended to answer three key questions:

  • What is the current level of undersaving for retirement of working age individuals?
  • Which groups are undersaving?
  • What is the depth of undersaving?

The analysis uses two different measures of future pension adequacy.

The target replacement rate (TRR) refers to the percentage of pre-retirement earnings an individual would need to replace to meet an adequate income in retirement; for median earners, this is 67% of their pre-retirement earnings.

The retirement living standards (RLS) developed by the Pensions and Lifetime Savings Association (PLSA) set out levels of expenditure for three different standards of living in retirement: minimum, moderate and comfortable.

The report points out that pension saving in Great Britain has been transformed by the introduction of auto-enrolment, with 86% of eligible private sector employees participating in 2021 compared with 41% in 2012.

However, headline findings include:

  • 12.5 million (38%) of working-age people are undersaving for retirement when measured against TRRs before housing costs, if the full value of an individual’s defined contribution (DC) pension is converted into an annuity. However, 5.3 million (42%) of these will reach more than 80% of their target income.
  • Higher earners are more likely to be undersaving relative to TRRs. Around 14% of those in the lowest earnings band (less than £14,500 gross pre-retirement earnings per year) are undersaving, compared with 55% in the top earnings band (more than £61,500 per year).
  • When measured against the PLSA minimum RLS, 12% of working age people are undersaving for retirement. This increases to 51% and 88% when compared against the PLSA moderate and comfortable RLS.
  • Lower earners are more likely to be undersaving when measured against the PLSA RLS. Around 34% of people in the lowest earnings band are projected to not meet the PLSA minimum RLS, compared with only 3% in the top earnings band.

DWP supports proposals to expand auto-enrolment

Meanwhile, the DWP is backing moves to widen eligibility for auto-enrolment, via a private members’ bill proposed by Jonathan Gullis MP.

This reduces the age for being automatically enrolled in an employer’s pension scheme from 22 to 18, and abolishes the lower earnings limit for contributions. The latter measure is intended to support retirement saving by those on low incomes or in multiple jobs.

Only a minority of private members’ bills become law, but government backing almost certainly guarantees that this one will be passed.

“Reducing the age to 18 from 22 and applying mandatory 8% contributions to earnings from the first pound may be the clearest example of widespread change for pension savers since the initial introduction of auto-enrolment,” said Samantha Gould, head of campaigns at NOW: Pensions.

NOW: Pensions’s underpensioned research with the Pensions Policy Institute has revealed that starting pension contributions from the first £1 of earnings would increase the pension wealth for some groups by as much as 52%.

“Pensions have needed evolution, not revolution, to continue on the path that began with [auto-enrolment]. While this is a moment for celebration, we’re not at the finish line yet and we will continue to work with government and industry stakeholders until these reforms are fully delivered,” Gould added.

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