Each year at Scottish Widows we undertake research that enables us to forecast the retirement outcomes of the nation.
This provides unique insights into the quality of life people can expect to enjoy in retirement, based on the income we forecast they will have available, and the expenditure we anticipate they will face.
Through this work, we predict that 18 per cent of people will enjoy only a minimum standard of living in retirement, enough to cover only basic needs and allow a meal out around once a month.
Worryingly, we forecast a further 35 per cent of people will not have enough income to afford even that. Our analysis assumes people work to state pension age and as many will be unable to do that, the actual picture is likely to be noticeably worse.
Considering the role of pensions in retirement, we face the challenges of both adequacy and coverage. In terms of adequacy, analysis suggests the statutory level of pension contribution at 8 per cent needs to increase.
There is consensus across the pensions industry that this needs to be at 15 per cent for a moderate standard of living. As it becomes harder to get on the property ladder, more people will be renting in retirement.
Those people would then need to save 22 per cent of their salary into a pension to cover that additional rental cost.
In terms of coverage, at present about 10mn workers are excluded from auto-enrolment, including those under the age of 22, those in low-paid and part-time jobs, many multi-jobbers, and the self-employed.
The government is lowering the age of AE soon, but that still leaves a significant proportion of people out.
Of course, pensions cannot be thought about in isolation. There are important issues around the cost of living and financial pressures on businesses that need to be considered when discussing increased pension contributions.
We also know that people are using Isas, stocks and shares, cash savings, property income, and inheritance in their retirement plans. People also need to save for a rainy day and larger purchases, such as a deposit for a home.
This means many often don’t have £3 spare to put £1 in each of those buckets. We therefore need to think of ways of helping some people put £1 in a bucket that helps them make progress against all three goals.
Supporting financial resilience requires short, medium, and long-term planning, even if that feels difficult at times like today when both people and businesses are feeling the pressure.
Making these difficult decisions will require a broad consensus across political parties, different government departments, employer bodies, trade unions, consumer groups, and stakeholder groups across the pensions industry.
