A new report from the Department for Work and Pensions has revealed that 38% of pension savers are ‘undersaving’ for retirement.
The report – The Analysis of Future Pension Incomes – suggests nearly four in 10 people are failing to save enough for a modest retirement.
One major surprise from the report, which estimates the number and proportion of working age individuals, aged 22 to State Pension age, who are undersaving for their retirement, is that higher earners are the most likely to be ‘undersaving.’
The report updates for the first time the DWP’s Analytical Report of the 2017 Automatic Enrolment Review. The DWP says that while the 2023 and 2017 analyses are not directly comparable, they follow a similar methodology.
The latest report looks in detail at pensions undersaving.
It focus on two key retirement income measures: Target Replacement Rate (TRR) – the percentage of pre-retirement earnings an individual would need to replace to meet an adequate income in retirement – and Expenditure-based Level – the level of income that might be deemed adequate using, for example, the widely-adopted Pension and Lifetime Saving Association (PLSA) Retirement Living Standards (RLS).
The Report, covering England, Scotland and Wales, found that a “large proportion” of the population are not saving enough to enjoy a reasonable standard of living in retirement.
Key findings were:
- 38% of working age people (12.5m) are undersaving for retirement when measured against TRRs Before Housing Costs (BHC), calculated on the basis of converting the full value of an individual’s Defined Contribution (DC) pension into an annuity
- Undersaving increases to 43% of working age people (equivalent to 14.1m) when 75% of an individual’s DC pension is converted into an annuity
- Higher earners are more likely to be undersaving relative to TRRs. Around 14% of those in the lowest earnings band (less than £14,500 gross pre-retirement earnings per year) are undersaving compared with 55% in the top earnings band (more than £61,500 per year). This may be due to the fact that State Pension will make up a larger proportion of a lower earners’ target income
- Of the 12.5m people undersaving, 5.3m (42%) are set to reach more than 80% of their target income
- 12% of working age people are undersaving for retirement when measured against the PLSA Minimum RLS (one of many alternative ways of measuring adequacy of pension income). This increases to 51% and 88% when comparing incomes against the PLSA Moderate and Comfortable RLS (Retirement Living Standards)
- lower earners are more likely to be undersaving when measuring against the PLSA RLS. Around 34% of people in the lowest earnings band are projected to not meet the PLSA Minimum RLS, compared with only 3% in the top earnings band
The report found that pension saving in Britain has been “transformed” by the introduction of Automatic Enrolment (AE) with over 10.8m automatically enrolled. Pension participation in the private sector for eligible employees has increased from 41% in 2012 to 86% in 2021.
Findings in 2017 showed the arrival of AE had reduced the level of undersaving in the working age population measured against TRRs from 14m to 12m individuals.
Employer pension contributions in the private sector have risen since AE was introduced from £29.5bn (2012) to £37.5bn (2021) in real terms.
The DWP says it remains committed to implementing the 2017 AE review measures and is focusing on supporting low and median income earners.
• The Analysis of Future Pension Incomes is a report from the DWP analysing detailed AE, pensions and population data from official sources.
