Will flexibility be a pre-condition to statutory levels of retirement savings that are sufficient?

Thanks to Auto Enrolment more people than ever are saving meaningful amounts of money towards their retirement.   However, many millions are still excluded; those under the age of 22; those with employments which pay less than ￡10k and of course the self employed.  

Even amongst those who are saving there are polar extremes.   At Scottish Widows we've calculated that for an average worker on a typical career progression, a total contribution of 15% of salary would be required to deliver a 2/3rd replacement ratio, at State Pension Age and that's including the State Pension at its current rate.   Many established defined contribution schemes already offer a potential contribution which is significantly in excess of 15% but for millions of other workers benefiting only from the statutory 8% contribution through Auto Enrolment, more needs to be done.

Statistics from the Department for Work and Pensions show that new contribution flows into workplace pensions are now circa ￡90bn per annum.   If we wanted to get everyone to a level where retirement savings levels were sufficient, we'll need to add tens of billions to that number.  To give some context, the UK's defence budget is ￡60bn per annum.

Britain isn't saving enough, and we need to shift the balance from consumption to savings.  We need to do this in a way which is acceptable to the public and in a way which enables British business to manage overall labour costs over time.   Salary sacrifice is a framework which we are familiar with in the pension industry.   Under this framework workforces, often in agreement with their trade unions, give employers permission to gradually increase pension contributions over time, offsetting those costs against a proportion of future pay rises.  This type of framework could be incorporated into Auto Enrolment as a means of addressing the imbalance between 'pay for today' and 'pay for tomorrow' and in a way which helps business keep total labour costs under control.

We need however to think about the impacts which diverting such large amounts of money, could have elsewhere.           

We know from Step Change that 14.5m people have nothing put aside for a rainy day and that 9m people use credit to pay for day to day essentials.   An unexpected bill can tip people into a cycle or problem debt.   If people do find themselves in financial difficulties this could increase the likelihood of opting out of a workplace pension.   At present those who opt out of employee contributions will also lose their employer contributions (pay for tomorrow*).  

We can't solve the retirement savings challenge in a way which risks tipping more people into problem debt, but equally we can't simply leave people with the choice of being impoverished now OR when they retire.   It also seems unfair to effectively dock people's pay* because they have gotten into financial difficulties.

A report published in March by the Department for Work & Pensions showed that this year was the first year where more than 50% of new births were to families in rented accommodation in conditions which that report described as 'precarious'.   The average person is now age 31 when they get onto the property ladder.   It's not that mortgage payments are greater than rents, its just that saving for a deposit can be hard.   

The Resolution Foundation predict that c35% of millennials may never own a home.  Unlike the majority of the baby boomers who own their home at retirement,  many millenials will need to pay rent through their retirement.   Around Britain the average rent equates to the c50% of the average pension and pension contribution rates tend to assume no housing costs in retirement.  We shouldn't seek to solve the retirement savings challenge in a way which has an adverse impact on living conditions today or which leaves many of today's young people impoverished when they retire.

It makes sense to think about the various savings challenges facing Britain not as distinct challenges which can be resolved in silo's but as interconnected challenges which should be considered and resolved together.  It seems unlikely that sufficient flows of savings can be diverted from consumption to ensure that everyone has sufficient pots of Short Term, Medium Term and Long Term savings.  This leaves the alternative of flexibility.   The Kiwi Saver from New Zealand is an example of a framework which considers Financial Resilience, Home Ownership and Retirement in a more integrated way.   

Is a 'Brit Saver' a potential future answer?    In research which we conducted amongst over 3,000 members of the public earlier this year, 70% of those under the age of 30 saw attraction in a retirement savings product with flexibility to help them get onto the housing ladder, whilst 60% of those in their 30's saw attraction in a retirement savings product which supported their financial resilience in the short term.     

If you are interested in these challenges, our white paper may be of further interest.