What looks good when it comes to retirement saving?

The debate over whose responsibility it is for building a good retirement fund has been a constant topic of conversation since the demise of final salary pension schemes. And with the government clearly seeing their role as merely averting poverty in retirement (with a minimal, flat rate, non-means-tested benefit), it really only falls between the employer and the employee.

If it were simply a question of what drives the best possible member outcome, the answer may be for the employer to shoulder the burden, and provide a non-contributory pension plan with between 12.5 per cent and 15 per cent funding.

The path of least resistance (in terms of attempting to engage employees with their retirement planning) drives the best outcome.

But, as we all know, this simply isn’t realistic in the context of most company budgets or whether employers feel confident that level of investment will generate some form of return on investment for the business.

So, how do we solve this conundrum? For any organisation looking at their wider benefits strategy, pension should be high on the agenda. If you look at most employee survey about benefits, pension is either first or second ranked in terms of most value.

If you are going to have any benefit that looks competitive, we believe it should be the pension.

Not a question of competitiveness

This is great, but how many employees truly know what good looks like when it comes to retirement saving? How many employers know what building a good retirement fund looks like for that matter?

And this is critical - providing a good pension contribution is not just a question of competitiveness, it is also one of supporting members in actually getting towards a good outcome.

There has been significant research conducted in the market by the Pensions and Lifetime Saving Association to help members understand what level of income they might require in retirement by creating the Retirement Living Standards.

Knowing what to aim for in the form of an income in retirement is one part of the equation; figuring out how to get there is the other.

Fortunately, Scottish Widows also conducted research to help members understand what that means in terms of contributions required.

For an average individual starting to save towards their retirement in their 20s and retiring at 65, they estimate that, as a rule of thumb, a total of at least 12.5 per cent between employee and employer will help members save towards an adequate retirement.

So, if we know what adequacy looks like (as a rule of thumb), the next thing to understand is that the gap between retirement adequacy levels and automatic enrolment minimums is significant – at least 4.5 per cent of salary.