Australian-style pensions targets could help deliver comfortable living in retirement

Australia has given us Dame Edna Everage, soap opera Neighbours and everyone’s (okay, my) favourite dance floor hit Down Under.

But keep a look out, possums, for its next export to the UK could be a potentially important tool for helping to ensure working people have a decent income in retirement.

UK pensions trade body the Pensions and Lifetime Savings Association is proposing the introduction of National Retirement Income Targets.

While the name needs some work, these targets set out the income required to enjoy certain levels of lifestyle.

Such an approach has been pioneered by Association of Superannuation Funds of Australia under the (equally unappealing) label “ASFA Retirement Standards”.

Its standards describe lifestyles ranging from a comfortable retirement, which includes an annual holiday and regular eating out, to at the bottom end, reliance on the state pension with day trips in one's own city and inexpensive takeaways.

Some elements might need translating for a British audience. Try explaining to an East London hipster that consuming his home-brewed beer is a sign of penury, not good taste.

But, as I told an audience at the PLSA’s annual conference in Manchester today, I think these targets have the potential to strengthen the hand of those of us pushing for improvements in workplace pensions.

Hitherto, when discussing pensions policymakers have tended to focus on replacement rates. This approach suggests that people need to replace a certain proportion of income to enjoy the same lifestyle in retirement. That proportion varies depending on a person’s current wages. This method are abstract and easily ignored.

Now we have something more easily communicated that directly relates to people’s standard of living in old age.

And the targets are based on income. This acknowledges that the biggest challenge workers face is finding a replacement wage when they leave the labour market.

That challenge is big. While automatic enrolment has brought millions more into workplace pensions since 2012, upwards of 13.6 million current workers face a dramatic fall in living standards in old age. Recent TUC research has shown that in many industries employer contribution rates are rock bottom.

How useful the targets prove to be depends on how they might be used.

If the aim is to persuade savers to put more money aside, it seems destined to fail. There are many barriers to saving: complexity, other calls on people’s income, lack of trust and inertia. These won’t be swept away with such an initiative. Equally, berating savers for irresponsibility for falling short of these targets would not get us far either.

They could be of more use to particularly engaged employers and to trade union reps who are seeking to deliver for workers pensions that give them a decent standard of living in retirement.

But their best application would be as a tool for judging policymakers. Are prevailing and proposed state and workplace pension entitlements going to deliver for people a comfortable standard of living in retirement?

If we are falling short, then steps should be taken to bring pension contributions up over time.

At the moment, those enrolled into pensions put in 1% of a portion of their earnings, and the employer another 1%. This will rise in two stages to reach a 5% worker contribution and 3% employer contribution in 2019. The employer share at that point will be 37.5% of total contributions.

This is where the PLSA pulls its punches, in what is, admittedly, a consultation document. It suggests employers should maintain this 37.5% share of contributions and perhaps move it up to 50%.

Yet, recent research from the Pensions Policy Institute suggests employers at least matching member contributions has a huge impact on outcomes.

At the TUC we have longed urged a move to two thirds of contributions from employers and remainder from employees.

The pensions workers receive at the end of their working lives still might be insufficient to take them on trips to the land down under. But it would be a huge improvement on what many have today.