- As a voluntary savings target, the living pension initiative sets out the minimum annual contribution needed to afford basic living costs in retirement.
- Employers should ensure that employees who increase their contributions in line with this are not saving at a rate they cannot afford.
- Organisations should engage employees in their future finances by introducing schemes to improve financial literacy and provide better pensions information.
Phoenix Insights’ September 2022 Great expectations: are people’s retirement income expectations adequate and achievable report revealed that half of defined contribution (DC) savers, equating to around 14 million people, are not on track for their expected retirement income. This suggests that support is much needed so employees feel more secure once they retire.
Enter the living pension initiative. Launched in March 2023, this is a voluntary savings target designed to help employees build a pension pot that meets basic living costs in retirement and sets out the minimum annual contribution required, with a focus on low-paid workers. But how will this impact retirement outcomes?
Boosting retirement funds
To become a living pension employer, organisations must provide a living pension savings level using a cash or percentage target. The annual savings benchmark is £2,550, which equates to 12% of a full-time, or 37.5 hours per week, living wage worker’s salary. The employer is required to pay £1,448 of this, or 7% of an employee’s salary, per year. This is higher than the 3% auto-enrolment rate.
This has the potential to make an impact on the funds staff have to live on after they stop working and move towards better retirement savings levels, says Shelley Morris, senior project manager at Living Wage Foundation.
“Where employers want to, and can, do more, we would encourage them to do so,” she says. “Many employers already recognise the challenge of pension adequacy and are stepping up to support their employees. By placing more value on retirement savings, employers have an extra incentive to do more and employees can have more confidence in a secure and stable retirement.”
Employers have an important role to play in ensuring that the right foundations are laid for employees’ financial futures, explains Abi Johnson, head of reward, compensation and benefits at living pension-accredited employer Phoenix Group.
“If everyone increased their contributions to 12% split between individuals and employers, many of those not currently on track for their expected retirement income would be brought back on, significantly improving their retirement outcomes,” she says.
Improving contribution levels
While the living pension has the potential to encourage higher contribution leves, it is only a voluntary savings target and employers do not have to participate. The rate can help low earners to increase their contributions, but care should be taken to ensure that they are not saving at a rate they cannot afford.
Employers should also look to increase minimum contribution rates for auto-enrolment and open this up to more workers, says Jonathan Bland, co-founder at Pension Geeks.
“The government should make auto-enrolment apply to all earnings and increase the minimum auto-enrolment contribution to at least 12% to be same as the living pension,” he says. “Savers can be given the option to opt-up or stay as they are, but ultimately, auto-enrolment should be starting from a new, higher rate.”
Organisations should improve how they engage employees in their future finances and support them to prepare for retirement in a holistic way. Schemes to improve financial literacy and provide better information for workers of all ages will be critical in helping to close the pension saving gap.
Employers can also help employees to save towards retirement by providing opportunities for them to be in work for longer and improve financial security in retirement, says Johnson.
“Other levers can alleviate the savings gap, such as the Private Member’s Bill currently passing through Parliament, which will allow the qualifying age for auto-enrolment to decrease from 22 to 18 and remove the lower earnings threshold,” she says.
What employees can do
As awareness of the impact of higher pension contribution rates on retirement outcomes increases, employees may start to ask about these when looking at potential new employers, or challenge existing ones that are only contributing the statutory minimum.
Alyshia Harrington-Clark, head of defined contributions, master trusts and lifetime saving at the Pension and Lifetime Saving Association, says: “Employees need to make sure they are saving enough for retirement. Saving earlier is likely to help build a bigger pot, which is particularly important for those who might take stretches out of work for caring responsibilities, such as women.”
In addition, employees can improve their pension pot by tracking down savings using the government’s pension tracing service, as bringing multiple pots together will make it easier to see if they are on track for retirement.
Employees should be encouraged to pay the maximum amount into a workplace pension in order to get the most out of it, says Johnson.
“Employers can encourage employees to seek advice to evaluate if they’re on track for an expected retirement income,” she adds. “The Financial Conduct Authority website or independent site Unbiased have lists of financial advisers, or consider signposting employees to free, impartial pensions guidance service Pensions Wise.”
As with other measures employees and employers can take, the living pension initiative has the potential to improve employees’ retirement outcomes.