LONDON (17 October 2016) – Aon plc (NYSE:AON) has published the results of its Defined Contribution Member Survey 2016 which show that only 16% of people contributing into a Defined Contribution (DC) pension scheme are saving enough to maintain their standard of living in retirement.
The study was conducted across the UK in collaboration with YouGov and included responses from over 2,000 DC scheme members. Eleven years on from the Pension Commission Report on saving, it reveals that UK workers are still worryingly out of touch with their pension savings requirements.
The survey highlights the enormous disconnect between scheme members’ current expectations and the reality of pension saving. By extrapolating the survey sample to the whole of the UK DC scheme population - estimated to be 8.1 million members by The Pensions Regulator -, the results show that:
• 2.75 million DC scheme members do not know the level of retirement income they are expecting to receive, and so are unlikely to be on target to maintain their standard of living.
• Half of DC scheme members, (four million people), will not have saved enough at retirement to maintain their standard of living, based on their own expectations.
There is also a clear lack of understanding, with one in four DC scheme members in the UK (two million people), having no idea of the level of income they will need to maintain their standard of living in retirement.
Furthermore, while in 2014 employees and their employers were saving together on average 15% of their salaries into their pension pots, this average has fallen to 12.7%. While more people are now saving into a pension scheme, many of the new joiners are paying the lowest auto-enrolment rates, pulling the average contribution rate down.
Sophia Singleton, partner and head of DC Consulting at Aon Hewitt, said:
“Auto-enrolment has successfully increased participation in pension schemes, but the vital next step is to ensure that these new entrants save a sufficient amount for retirement. It is crucial for employers and trustees to have the right structures in place to make retirement saving easier to understand, which would encourage employees to contribute more.”
On average, Aon calculates that DC members are saving £1,400 per year too little into their pension pots. This represents an estimated £11.4 billion DC savings gap per year.
In addition, the survey reveals that company pensions are still a main source of income when people retire, with almost two-thirds of respondents relying on them for income in retirement. Workers, and especially younger scheme members, maintain a high expectation that employers will provide guidance and advice about pension savings; 60% of employees trust their employer’s guidance when considering where to save for a pension.
Sophia Singleton, continued:
“We still see that members look to their employers for guidance. The trust that is placed in them when it comes to pension savings, means that there is a real responsibility to provide adequate and clear communications in order to improve member engagement and contribution levels.”
Lynda Whitney, partner at Aon Hewitt, said:
“The upcoming review into auto-enrolment provides the government with a timely opportunity to identify what has worked and what needs more attention. It will need to work with the pensions industry to improve member engagement and to reduce this savings gap so that employees can develop adequate pension pots - and therefore viable levels of future retirement income.
“Employers are expected to help members navigate through the complex pensions environment, but the government also has a responsibility to make it easier for companies to put in place the right kind of retirement savings structures.”
Other key findings from the survey include:
• 62% say that the company pension is one of their main sources of financial support for retirement
• There are more members enrolled in DC schemes but they are joining with lower contribution levels. 37% of people are saving less than 5% of their annual salary
• Another 48% are saving 5-10% of their salary
• 39% of people expect to have retired by 65, and in the last two years expected retirement age has increased by half a year.
• 51% value flexibility especially in their drawdown product – they don’t want to be locked into anything.
• Millennials (18-34 year olds) are twice as likely to seek advice online compared to over 55s.
• 36% of millennials still expect to retire by age 65
• 1 in 10 say nothing is stopping them from saving more into their pension
• Of those who know how they want to take their benefits, two-thirds say they still want stable income in retirement, even among lower earners (less than £20,000 a year) 57% still want a stable income.
In real life…
Aon has looked at what an average individual would need to save in order to be able to retire at age 65 and maintain their living standard:
A male DC member aged 25 and earning £22,500 a year needs to save 18% of his salary, or £4,050 per year, to maintain his standard of living if he wants to retire at age 65 (based on DWP benchmarks).
A male DC member aged 40 and earning £30,500 needs to have already saved a pot of twice his salary i.e. £61,000 and continue to save 19% of the salary to maintain his standard of living if he wants to retire at age 65.
Despite the equalisation of pension ages, on average women still expect to retire half a year earlier than men. The combination of retiring half a year earlier and living three years longer means that to have the same income per year they need to save 15% more than men. i.e 2-3% of salary more.
How could DC members save those extra £1,400?
The average annual savings gap is £1,400 or £27 per week. DC members can plug that gap by making some lifestyle adjustments such as:
- Cycle to work: By giving up Zone 1-3 annual travel card a person can save £1,520 annually and add this to their pension pot.
- Bring your own lunch: By bringing home-prepared lunch instead of spending an average £5 a day on a sandwich and a drink from the high street chains, an employee could save £1,200 per year.
- Spend smart on leisure: According to the ONS, an average household spends £6,425 on leisure and entertainment per year. By shopping around and adopting some smarter spending techniques when booking a holiday, a restaurant or cinema tickets, an individual could take 20% off all expenditure on restaurants, alcoholic drinks and recreation - and therefore free £1,285 for their pension pot.
For further information please contact:
020 3219 8887
Notes to Editors
All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,004 adults. All respondents are currently paying into a DC pension scheme, and are working in full or part-time employment. Fieldwork was undertaken between 17/06/16 and 24/06/16. The survey was carried out online. The survey was carried out online. The figures have been weighted and are representative of the target audience.
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