Why a 12% pension saving rate is wrong.

henry tapper

9 years ago

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.

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.