Why a 12% pension saving rate is wrong.



PLSA’s forecast for Retirement Income Adequacy



I had hoped to talk yesterday with and  today about Lord Turner and the meeting of minds at the Pension and Lifetime Savings Association.

The change of title a year ago had, I hoped , heralded a more open discussion on issues such as Retirement Income Adequacy, the title of yesterday’s hot topic debate.

Unfortunately, I was presented at the door with a bill for £610 +vat for what amounted to 3 hours talks and a bit of debate (and that’s with a fund member’s discount!). The rows of unused badges from journalists who had  been given free places suggest that the PLSA wanted publicity – but maybe not debate!

I have however spent some time reading the research carried out by Hymans Robertson on behalf of the PLSA on data collected by the PPI. The report itself is excellently drafted and has some really good analysis, the data is as good as could be.

But the conclusions (as illustrated by the chart above) ridicule what we are doing with auto-enrolment, suggest that even when we get to 8%, we aren’t doing enough and suggest we will need to work five years longer and save 50% more to have any chance of getting out of the red and into the green.

Two small flaws – flaw one

The report is seriously flawed. If we look at its findings as pension people we must question the comments on family status at its end. Most people start retirement in a relationship and become single the longer they live. Most people don’t expect to be supported by a partner, but they do rely on someone else. The PLSA report makes no allowance for this, it assumes in its “replacement rate” calculations , that we go alone into that deep night.

Relationships that start when we are at work , continue in retirement – this is why many women work part time. Divorce is on the up in retirement, perhaps suggesting that many older people are self-sufficient on their own, but self-sufficiency (financially) is not something that people with very low private pensions aspire to.

My question to the PLSA, Hymans and the PPI, is have you dodged this? It is of course hard to model, but I suspect that the poorer you are in retirement, the more you depend on others – particularly your life partner.

The findings of the report do not take into account partnerships and families

Two small flaws – flaw two

The modelling assumes the purchase of an RPI linked annuity at today’s (depressed) rates. Is this a luxury those on low retirement incomes can afford? People already have earnings linked state pensions – can we not model around a flat-lining income in retirement – people’s income needs in retirement do not generally follow retail price inflation

The assumptions are what you would expect from old school actuaries, but they do not engage with the new world of pension freedoms and they pay scant regard for the dependencies we have in retirement (which extend beyond pensions).

The report presents DC as if it were DB – and the most expensive version of DB, the costs of pensions are over-estimated.

One big flaw – one big fat micro flaw

Perhaps I am disillusioned by not being able to afford to attend the debate, but I wonder what world the folks at PPI/PLSA and Hymans are living in. I suspect it is one of high incomes, stable employment and good prospects of income growth. In short – a world where financial hardship is not a day to day factor.

It was unfortunate that the day on which this paper was published, coincided with the publication of the IFS’ analysis of the Government’s projections for people’s incomes over the next few years.earnings-2

This chart shows that people’s average earnings (the black line) are projected to fall between 2008 and 2021.


This is down to new (post Brexit) projections from the ONS and OBR


Worse, the impact on income levels will be worst for those on low incomes (10th to
50th decile, than those on high incomes (those on the right hand side of the graph).


You can see the reason for this by looking at the tiny changes the autumn statement will have (relative to the blue boxes representing what had previously been announced in Osborn’s austerity budgets).


This graph is not from the IRS but the Resolution Foundation and it shows that for this fall in income is massive , a disaster in terms of people’s earnings expectations.

To suppose (as the PLSA do) that people can simply save 12% on top of all other deductions and work 5 years longer does not play well to ordinary people. I am not arguing that we hand over the reins of pension policy to populism, but I think we need to be realistic.

Now is not the time to be telling people that the slow progress they are making is not progress enough. The charts above show just what a huge challenge we have ahead , getting our savings from 2 to 8% of the band. The last thing we need is to be told that this is insignificant!

Two micro balls ups and one macro cock up

It is time for the PLSA to wake up to real world issues. People aren’t going to pay over £700 to hear someone explain their report, people aren’t going to save over 12% of earnings they just about make do with.

We need to wake up to the way people support themselves in retirement by studying actual spending patterns. People on low retirement incomes get by without large occupational pensions because they always have, they find ways round. Auto-enrolment is about adjusting the balance between dependency and self-sufficiency but it is not (yet) about making us all self-sufficient.

Ideological solutions to pensions, the ones that suppose that we should pack up work and put our feet up , are both unrealistic and dangerous. They are unrealistic because they assume people have a limitless capacity to scrimp today to splurge tomorrow and they are dangerous because they alienate pension people from those in Government.

Frankly, if I was Richard Harrington , reading this document, I would not be impressed.




PPI data;  http://www.pensionspolicyinstitute.org.uk/publications/reports/adequacy-in-retirement

PLSA report; http://www.plsa.co.uk/PolicyandResearch/DocumentLibrary/~/media/Policy/Documents/0605a-%20Retirement-income-adequacy-Generation-by-Generation-%20Appendix-Methodology.pdf

Appendix methodology (Hymans Robertson’s assumptions) ; http://www.plsa.co.uk/PolicyandResearch/DocumentLibrary/0605a-Retirement-income-adequacy-Generation-by-Generation-Appendix-Methodology.aspx

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Why a 12% pension saving rate is wrong.

  1. Brian Gannon says:

    Henry – Although your point about people finding ways to get by when they have low incomes is right, doesn’t that prove that the levels of pension savings rates do need to be higher? Given that people can opt out, surely it is a good idea over time to set contribution levels at a rate which might give people a chance of enjoying retirement rather than enduring it? I take statistical surveys with a very large pinch of salt but the message that pension savings rates need to be higher in order to achieve more meaningful incomes in retirement is surely a good one? No-one in the general public reads this rubbish so it is more about helping those in government understand what people need to do. I doubt the rate of opt out is going to soar on the basis of this report saying 8% is insignificant, since the general public will never read this and will never hear of this report.
    Governments for too long duck the real issues in society. The NHS keeps people alive longer so they stay ill for longer. Therefore we need to either suffer in old age or else we need to pay more taxes. No major party has told the truth like this so our NHS limps along and our social care leads to people out on the street unable to look after themselves or indoors being neglected. Similarly no government has had the balls to do anything about the need to make AE compulsory. Why on earth corporation tax is reducing to 17% and income tax thresholds going up when we need to fund pensions and health I do not know. (I do know the arguments about lower taxes leading to greater revenues due to higher productivity and GDP growth as I have an Economics Degree, but what we need is more tax and higher pension contributions). If we must reduce tax on profits which are in large part generated by their employees, then employers should direct the savings in corporation tax to higher employer contributions. I am a very good workplace pension presenter and one of the reasons I am so good is I tell it like it is. I give background and context to their AE schemes, and the funny thing is that large numbers of people then decide to make higher pension contributions when they join the dots and realise what 8% will give them. I don’t tell them 8% is not enough – I show them what 8% gets them and then ask them if they want more than that, having also explained the state pension provision. People need to know the truth and will then make their own decisions. If someone doesn’t know they are ill they won’t take their medicine.

  2. seniorteam says:


    Some good points in this.

    I suspect the position is even more complicated and potentially more challenging when we factor in debt and housing.

    The debate on adequacy needs 2 or 3 more dimensions if it is going to reflect the lives of the vast majority if our citizens.


    Sent from my iPhone


  3. Robert Cochran says:

    Good analysis Henry and we’ll put points. SCOTTISH WIDOWS research shows more than half the population currently contributing at 12% – plateaud this year and I work that as the DB people in the survey increasingly get replaced by DC savers the figure saving 12% will decline, despite AE rising contribution levels.

  4. Scary projections for basic pension increases (unsustainable?) and NMW (meaning average earnings are dumbing down to meet this increase?). A huge conundrum complicated by 5 year political terms in office (short term thinking).

    Odd thing is those who know their correct retirement income requirements (not all about pensions) and put plans in place to meet this have always been in the minority. The others, the vast majority who live for today, expect low taxes, a fully funded NHS, great free schools for their selfish off spring and their every day needs, now and forever, to be pampered to by the government of the day (or they will complain on Facebook) will get what they deserve.

    There is no political or mass public appetite for compulsory pension savings and with pensions freedoms the government has shown its true colours “spend your future today so we have enough tax income today and sod tomorrow”

    There is also no shortage of advise on how much people should be saving for THEIR futures but most ignore and just complain how they cannot afford to drive BMW’s and go on foreign holidays like everybody else. So my view, sod em, if they cannot be bothered to sort their own futures out then that is their problem not mine ( although probably a future higher tax bill looms).

    What needs to happen, in my opinion, is for those who take this problem seriously, to fight one very simple battle, namely to make retirement saving plans low cost, transparent and tax efficient for the silent minority who do take it seriously. Selfish? I don’t think so, no more than the millions of others who expect me and the other “high earners”, to pay more taxes because they have no self control.

    Rant over.. Keep up (most of) your good work Henry..

  5. Brian Gannon says:

    @Tony Slimmings whilst I agree that many people will never pay enough into their pensions, and whilst I agree there is no appetite for compulsory savings, funnily enough there is no appetite for paying income tax or national insurance contributions and yet people still pay both. Because they have to. And again, whilst many people may have access to advice, the vast majority do NOT. I don’t know which parallel universe you live in where you think people can have access to financial advice, but since RDR vast swathes of lower and middle England have no access at all to advice. Advice is not the same as information or guidance. Yes there are loads of newspaper articles and lunchtime tv programmes about pensions. But a) no advice is given, all that happens is the tv programmes provide only anecdotal largely incomplete scaremongering information (bit like both sides of the Brexit debate really) which very rarely is delivered in terms which mean anything to the man and woman on the street (or the sofa). And people in workplace pensions largely receive nothing other than joiners packs and skimpy statutory consultation letters. Yes the big FTSE 100 companies may have large HR departments but most employees who AE is directed at have no such access to advice.
    And in cases where employers have paid for me to deliver pension presentations which contextualise pensions (and other forms of savings eg ISAs, bank accounts, under the bed, Lifetime ISAs, property rental income, shares etc) I find that many employees do take ownership of their pension decisions. And to be fair a very large number do not. Funnily enough I find it is the older employees who have given up on themselves and even then when the older staff are presented with information properly they usually at the very least stay enrolled. As regards the key thing being that transparent low cost savings plans should be available to rich people, they already are. And whilst I am not in the camp of irresponsible, out of control scroungers that you tell to go sod themselves, I am pleased that I am not in the camp of selfish rich bigots who think they deserve to earn loads of money because they work hard or are clever or who have a special skill. I’m hoping that you are not in that camp either Tony.

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