Advisers are between a rock and a hard place when it comes to telling employees how poor their retirement is likely to be says Teresa Hunter
There is much debate about “good outcomes” in DC schemes. Helpfully the Department of Work and Pensions has published guidance on the minimum employees need to survive after they pick up the gold watch, or more typically today, the voucher for the garden centre. True to form, the DWP’s ambitions are modest, being quite content if many achieve an overall retirement income of just half their in work earnings.
Unfortunately, even at this low level most are in for a rude awakening. Startling research from pensions consultant Hymans Robertson has revealed that seven out of 10 members of top quality DC schemes won’t get anywhere near this most minimal of targets by the time they hope to retire.
Across many schemes the failure rate will be 90 per cent, although the average produced by the Hyman’s models were slightly distorted downwards, because they included a few retailers, with large numbers of low paid workers with a better chance of reaching their target by virtue of the fact that the state pension alone will nearly get them there. We all expect the great unwashed to reach retirement with wholly inadequate pensions, but the likelihood that those on good earnings saving responsibly with supportive employers are headed for a similar pension crunch is surprising. It certainly came as news to their advisers.
What is shocking about the Hyman’s findings is that it is based on 90,000 real people who are currently members of some of the best DC schemes in the country. It is the first and biggest work of this kind.
It is not difficult to find the culprit, which can be summed up in the word “default”. Employees make the default contribution, follow the default investment strategy, however inappropriate, and expect to retire at the default retirement age.
They will need to increase their contribution significantly throughout their working life, and should be told they may also have to continue working much longer than they expect. This should happen long before they reach 65, 66 or whatever.
None of these messages will be welcome by employees, who would rather swallow assurances from their human resources department that they are invested in a good scheme, which has been put in place by a benevolent employer.
All of which leaves advisers between a rock and a hard place. To do their job properly they have a responsibility to ensure large numbers of employees do not arrive at the scheme retirement age, only to discover they are hundreds of thousands short of what they need to live on in retirement. Someone on £70,000 at retirement will need £27,500 plus a state pension of £7,500 to reach his £35,000 survival income.
But on average, he is likely to be £350,000 short of the £850,000 needed to acquire this income, leaving him missing around £11,000 annually.
So what is the solution? These good schemes, such as those examined by Hymans, will usually offer opportunities to save more during a working life.
Regulators may have a role. If the DWP has drawn up a minimum income needed for surviving the twilight years, employees should be told what that figure is likely to be in their own particular circumstance. Their pension pot could be measured annually against that target.
This will still bring us back to saving more and retiring later, which is in itself yet another annoying platitude. Given the sharp fall in first-time buyers over the last decade, many young people find it almost impossible to buy a home, let alone put more into their pension.
So saving more, while keeping a roof over a young family’s head may be out of the question. When they might be able to save more, later in life, or when they receive one-off windfalls such as bonus or redundancy payments, the tax regime works against them.
Without an annual cap of £40,000, the contribution limit for next year, many people would be able to make up short falls of anything up to £300,000, by pumping in money when they can, getting them close to their minimum target. With it, like the 80 per cent currently saving into top quality schemes, they have no chance.
Teresa Hunter is a freelance journalist