PLSA gives its thoughts on former Pension Minister's Ski Slope of Doom report

The Pensions and Lifetime Savings Association (PLSA) has issued its comments on former Pension Minister, Steve Webb’s, new report; The Ski Slope of Doom.

Nigel Peaple, Director of Policy & Research, PLSA, said: “Automatic enrolment has been the most successful pensions reform in a generation, however as Steve Webb points out, contribution levels are too low to ensure everyone will have a comfortable income in retirement. As we found in our Retirement Income Adequacy report, only about half of savers are on track to achieve the retirement income targets identified by the Pensions Commission. And, when you only consider people with defined contribution or “pension pot” pensions, the type now most commonly used, well over 90% of people will fall short.

“Despite the uncertain economic outlook, as we argued in our 2018 Hitting the Target report, we believe the Government should increase the level of automatic enrolment contributions from today’s 8% of a band of earnings to 12% of all salary in the late 2020s. Under our preferred approach, by 2030, the pension contribution would be split evenly between employers and employees – with the employer paying 3% more than now and the employee paying only 1% more than now. If the employee cannot afford the extra 1%, they should be given the choice of staying at the current level of 5%.

“However, people should not despair. A full new State Pension alone, currently worth £9,338 per year, delivers most of the income needed for an individual to achieve the PLSA’s ‘Minimum’ Retirement Living Standard which is around £10,000. Moreover, a couple sharing living costs will exceed that level. 

“But independent research with the British public carried out for us by Loughborough University has found that people would like retirement expenditure to be higher than this as set out in the ‘Moderate’ (£20,000) and ‘Comfortable’ (£30,000) levels. Therefore, extra pension saving, made easiest when included within the automatic enrolment regime, is something that most people should seriously consider doing. Workplace pension saving benefit both from employer contributions and tax relief from the government.”

Despite the success of automatic enrolment, most people are not currently saving enough to achieve adequate retirement outcomes. In our 2018 report Hitting the Target: the Pensions and Lifetime Savings Association (PLSA) called on the Government to raise the minimum contribution levels for automatic enrolment from 8% of band earnings to 12% of total salary between 2025 and 2030 and rebalance employer/employee contributions so that they 50% each. This will ensure that pension saving remains affordable for savers.

In 2016, the PLSA’s Retirement Income Adequacy report, found that only 50% of employees are on track to achieve the retirement income targets identified by the independent Pensions Commission. In simple terms, their targets assumed that someone on average earnings (today around £25,000 a year) would wish to have an income replacement rate of 67%, someone on half average earnings (today around £12,000 per year), would require a 100% income replacement rate, and someone on twice average earnings (today around £50,000 per year) would require a 50% income replacement rate. Moreover, if you exclude savers in defined benefit (eg final salary or CARE) schemes from the figures and just take account of saving in increasingly typical defined contribution (or “pension pot” or “money purchase”) pensions then only 3% are on track to achieve these targets.

In 2019, the PLSA launched its Retirement Living Standards that are designed to help people picture the lifestyle they want when they retire – and understand the cost. Like the 5-a-day healthy eating initiative, the PLSA’s ambition is for the Retirement Living Standards to become a widely adopted industry standard. The PLSA wants to see schemes representing 90% of active savers adopt the standards by 2025. To date, over 14 million savers – including over 10 million active savers – will have access to the Standards following their adoption by 53 organisations including 30 pension schemes, 17 pension business adopters and six other bodies.

Roughly speaking, a single person will need about £10k a year to achieve the minimum living standard, £20k a year for moderate, and £30k a year for comfortable. This can be briefly summarised as 10k-20k-30k. Importantly, for couples who share living costs the standards are more affordable - 15k-30k-45k. For many people their private and state pensions (the full state pension increased to £9,338 per year in 2021), and other savings will ensure that nearly everyone will be above the Minimum standard and be well on the way to achieving the Moderate standard. Currently most people when they reach retirement do not have a mortgage, rent or social care costs so these and other costs, such as tax on pension income, may need to be added depending on individuals’ circumstances.

The following tables show the required defined contribution pension pot sizes required to achieve each standard.

Table 1: Fund size required to reach different RLS standards 

Table 2: Fund size required for a couple 

To encourage and celebrate employers who provide more generous than average workplace pensions, the PLSA operates the Pension Quality Mark. Today, almost 200 employers, hold this mark. To gain the award, employers must offer a pension with an overall employer and employee contribution of at least between 10% and 15%. The scheme must also demonstrate high standards of administration, member communications and governance.

Mark Smith, Senior PR Manager
 020 7601 1726 |  [email protected]k

Steven Kennedy, PR Manager
 020 7601 1737 | 07713 073024 | [email protected]