It is the DWP’s first analysis of retirement income in the UK since the analytical report of the 2017 auto-enrolment review and it was published on the day the DWP supported the second reading of a private member’s bill , enabling the extension of auto-enrolment as proposed in 2017.
I haven’t seen this published, but it seems reasonable to suppose that the 2022 analysis justifies Laura Trott’s support for the 2017 AE reforms and plays to her Ministerial Priorities ; the three pillars
Fairness – Adequacy – Predictability
So what is the analysis telling us?
The analysis does not tell us what we might expect to hear. Indeed John Ralfe’s reaction to the report was characteristically blunt.
the report’s implication that we should be worrying about highest earners is just silly
Where is undersaving most acute? Amongst the HIGHEST income households!
Wait, what?! pic.twitter.com/SEp3ChWhXx
— Toby Nangle (@toby_n) March 4, 2023
What these numbers are telling us is that people who have the highest workplace incomes are likely to see the most dramatic fall in post-retirement incomes, though it goes on to show that these are mostly people who reach retirement without mortgages, not needing to pay rent and with the likelihood of wealth outside of pensions.
Importantly, the more wealthy are seen to generally get to the threshold of “moderate” income defined by the PLSA’s retirement living standards.
The most important charts (for me anyway) in this report are the ones that show likely changes in “adequacy” over the years to come
% of DC savers who miss replacement rate does fall though as auto-enrollment matures. pic.twitter.com/apQRhV24mF
— Toby Nangle (@toby_n) March 4, 2023
This assumes a core of 70% of workers who will be well enough served by DB or a combination of DB topped up by DC to meet moderate retirement income thresholds with more of those with a bit of both hitting the threshold by 2060 than those relying just on DB. There are 20m of us working today with a bit of DB and a bit of DC and only 2m with just DB.
But where improvements kick in over the next 40 years is among those who simply have pension savings through DC workplace schemes and here is the Government’s good news story. After a few years between now and 2030, the money from auto-enrolment leads to a dramatic increase in people meeting income thresholds. in 2030 60% of DC savers are estimated to be under pensioned but 20 years later this number has decreased to around 30%.
But the good news is countered by the more difficult news that 2.8m workers are not in any kind of pension and they have only a one in five chance of meeting retirement adequacy. That doesn’t change over the next 30 years.
Of course the proportions of those having a mix of DB and DC decrease between now and 2060 and the proportion having only DC increases. Which is why we need the AE reforms and some would say a lot more. This appears to be the DWP orthodoxy on “adequacy”.
The Adequacy orthodoxy is open to challenge
The report has been picked up by those providing retirement savings as a sales aid. Here’s Tom Selby commenting in the Times on behalf of AJ Bell
“It’s deeply worrying that millions of people are not on track for an adequate retirement. The big warning to many people is that they are going to be left relying on the state pension in later years which is only supposed to provide a basic level of income,”
Save longer , save harder and if you are self-employed – get yourself into a SIPP (or Nest).
But not everyone sees things in this way. A friend of mine commented privately
Adequacy is anyone’s guess and DWP seems to want people to feed the asset management industry.
I suspect that there are a lot of ordinary people who do not see it as particularly “fair” that they are going to have to rely on such an un- “predictable” means of providing retirement income as happens in DC today.
Turning to the assumptions in the report, I see that the DWP is modelling based on 80% of DC savers buying a level annuity and 20% buying an increasing annuity. There is even modelling based on rises and falls in annuity rates. Similar assumptions are built into the growth of DC pots. The choice of assumptions is indeed “anybody’s guess” but the predictability of the DC system looks overplayed and the fairness of guaranteed income from DB and “anybody’s guess” for DC is the subject for further work from the DWP.
Let’s leave it for now that DB and DC do not seem to be offering the same predictability and their funding does not seem particularly fair.
So what’s the report telling me?
I suspect that this report is telling me a lot about the DWP’s intentions. The state pension is now providing a floor that is lifting people out of poverty and pension credit (not included in this modelling) means that most people shouldn’t be destitute in old age. This is a big improvement from 40 years ago.
It’s telling us that the DWP believes that the DC pension will seriously improve retirement chances for those who don’t have a DB pension and that most people with DB pensions will be ok.
It tells us that people who have high incomes are going to have to work a lot harder than in the past to replace those incomes in retirement- mainly because they won’t have fully funded DB plans but also because of tax restrictions.
But most of all, it’s telling me that there is a lot or work to do on DC pensions if the DWP can boast that they are achieving Adequacy- Fairness – Predictability.
I agree with Jo Cumbo’s and Tom McPhail’s comments, that for Government to place such reliance on DC going forward, they are going to need to ensure that the DC saving system becomes a retirement income system that delivers outcomes that are world leading. We are some way from that.