Martin Willis, Partner at Barnett Waddingham, says: "The IFS has done an excellent job in highlighting not just the challenge we face with retirement adequacy, but the nuances around it. Minimum income requirements in absolute terms and replacement ratios are two very different things, but both are important. Getting people to the minimums is a must, but if people don't hit replacement ratios it will have a very damaging impact on both them and our wider society. We also need to get away from the assumption everyone owns a house by the time they retire - members deciding whether to save less in order to own a house or more because you won't is a critical decision. Employer affordability is a necessary consideration too - there's no magic money tree, and getting employers to fund higher contributions won't help wage growth. So there's a lot of sense in directing the employer additional spend to making the 3% starting contribution non-contributory.
"But there are challenges with this too, especially when it comes to complexity and unforeseen consequences. Years of pensions legislation has created a monster of rights and options and the feedback from people is clear - they want pensions to be simple. Even, as the report notes, the concept of replacement rations turns people off! And all of this adds complexity - having higher contributions on salary above a certain band and options to opt-down is confusing.
"In addition, what's to stop anyone, even at higher income levels opting out of the employee contribution? You could cap the non-contributory option to an earnings level, but that adds yet more complexity. Equally everything is focused on the standard automatic enrolment requirements of 5% and 3% of qualifying earnings - many schemes offer different structures, such as 5% and 5% of basic pay. This raises all sorts of questions - does the employer have to offer the 5% non-contributory, or are they compelled to offer a 3% non-contributory? Either one could confuse savers and/or and reduce saving.
"Then you have the integration of sidecar savings - a great idea in principle, as we know that people don't have a rainy day fund and would save more for the future if they could access it for emergencies. But if you open it up to people who would benefit from reducing the lower earnings limit, surely you have to open it up to everyone currently contributing on earnings from the first pound. More complexity!
"This is not to say that complexity should render inaction. The pensions timebomb continues to tick, and action must be taken to improve outcomes for members. The IFS highlights all the right issues and identifies interesting ideas to solve them. The real challenge for the Pensions Minister is inserting such findings into the system whilst keeping the simplicity that has aided auto-enrolment so far."
IFS Report Adequacy of future retirement incomes: new evidence for private sector employees
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