For many people, pensions are too confusing or such a long way off it does not seem real. Their annual pension statement may not make much sense because it is not set within the context of lifestyle.
But translate the hard facts and figures into something they can relate to and it might be a different story.
The Pensions and Lifetime Savings Association has done this by proposing a set of national retirement income targets based on a basket of goods and services people would be able to afford at different levels: state pension level, modest and comfortable.
It has appointed Loughborough University to research exactly how the targets should be constructed and expects to have the finer details ready in January. But has the idea gone down well in the industry?
Tangible versus intangible
Commentators say targets would focus people’s minds on what sort of retirement they would like, what they are on track for and what they can do to change things if necessary – whether that be working longer, upping their contributions, increasing investment risk or adjusting their expectations. However, the targets need to be realistic.
“Hitting people over the head with numbers is not the right approach. This usually has the opposite effect because it creates obstacles that are often too big, causing people to just switch off,” says Willis Owen head of personal investing Adrian Lowcock.
He believes the targets will be useful but has identified some problems.
“The illustrations will either be too general for specific individuals or they will require people to do budget-style retirement plans, which are off-putting for many. A tailored income basket also requires people to think in detail about what their retirement will look like. That is very hard to achieve because there are so many unknowns, such as inflation rates, the costs of healthcare, dependents and maybe helping grown up children.”
Stephen Sumner, managing director, Explore Wealth Management
“It’s a great idea. The vast majority of people I see don’t know how much income they will get at retirement and at what age they can afford to retire. The targets will show in real terms the lifestyle people can expect to have based upon the level of saving.
“It will resonate with people – if you don’t save more into your pension, at retirement you’re likely to be living in a flat with a 10-year old car and be lucky to go on holiday for a week in Bridlington once a year. That said, for people in their 20s, retirement is so far ahead that they won’t take it seriously.”
With tailored advice at one extreme and giving everyone the same target at the other, Hymans Robertson partner Lee Hollingworth believes there is some middle ground in terms of basing the targets on some form of individual circumstances.
“The best way is to base the targets upon earnings, which is a reasonable proxy for the needs and lifestyle people are looking to maintain,” he says.
PLSA director of policy and research Nigel Peaple says 19 focus groups across the country have been helping to flesh out the details of the targets and there has been a consensus as to what constitutes typical lifestyles at each level. He adds the targets are not trying to replicate the detailed world of advice, but rather provide people with a generic steer.
“There needs to be a mix of public awareness, doing something about it and it being easy for people,” he says.
PA Consulting pension expert Mike Teall says the lack of engagement from the public in planning for retirement is like a broken record. He finds the PLSA’s focus on lifestyle refreshing but says the industry should acknowledge that it is just one category of retirement need.
“Leaving an inheritance and, increasingly, funding long term care, should all form part of an individual’s retirement planning experience,” he says.
Barry Davidson, head of financial planning, Thorntons Investments
“Presenting information in a way that shows what a pension pot can buy can shine a light on what people can realistically expect. One size does not fit all, however, and the industry should proceed with caution.
“The last thing we want to see is people become despondent and bury their heads in the sand should they realise they will never be able to save enough to have all the things they would want in retirement.”
State Street Global Advisors head of EMEA pensions and retirement strategy Alistair Byrne thinks the targets will help engagement but is concerned it could easily give way to inaction.
“We need to continue with behavioural nudges such as auto-enrolment into the scheme and automatic escalation of contributions over time,” he says.
The PLSA recognises that, to work effectively, its targets will need a framework of supportive measures from the government, including auto-enrolment contributions increasing to 12 per cent by 2030.
Mattioli Woods consultant Thornton Wells points out that some employers feel the responsibility for their employees’ retirement savings is being pushed onto them through auto-enrolment and is concerned that a proposed 50/50 split in contributions between employer and employee will stretch smaller businesses.
However, he says engaging with employers can show them they risk losing staff if they do not provide financial education and flexible benefits, or risk staff being less productive because they are worrying about their finances.
Some believe the PLSA’s targets can only work with government backing but Selectapension national accounts director Peter Bradshaw says this is unlikely to happen.
“The PLSA’s report is heavy on why but light on how. It recommends the government should do this and do that – but I don’t think the government is interested in whether people have a swimming pool or can afford flights to Australia. It’s more interested in the issues of social care and bed blocking,” he says.
Altus Consulting head of retirement strategy Jon Dean thinks the targets need to tie in to a meaningful call to action.
“For example, where a pension scheme member is not currently on track to meet their target income, the tool or website needs to suggest a new higher contribution rate or saving strategy that would increase the member’s likelihood of meeting their target,” he says.
The young ones
Educating people around retirement savings and spurring them into action at a much earlier age is beneficial for a number of reasons, not least that they will not have to make big contributions later in life to catch up and their investments will benefit from the effects of compounding over time. However, some are concerned about national retirement income targets for younger people.
Intelligent Pensions head of pathways Andrew Pennie is generally supportive of the targets but says they will only work if they are relevant, meaningful and constantly reviewed.
“Getting relevant income targets will be difficult for someone in their 20s and 30s- they won’t know their living costs in retirement, whether they will be married with kids, whether they’ll have to fund their kids at university. It gets a lot easier and clearer when you get closer to taking benefits,” he says.
Bradshaw believes one solution is to start financial education and awareness in schools.
“We could amend the targets for teenagers, so instead of talking about refurbishing your kitchen, you could talk about a comfortable retirement in terms of being able to keep your Netflix subscription.”