How you can help create a Living Pension for your employees

A workplace pension can be a great way to save for retirement because individuals benefit from tax relief and employer contributions. But, how much should they save? This is a tricky question because everyone is in a different position, with varying levels of existing savings and expectations about lifestyle in retirement.

Being in the midst of the COVID-19 pandemic introduces further uncertainty about future plans. Recent research carried out for Aviva in our report Thriving in the Age of Ambiguity highlights this. It reveals that:

• 47% of employees don’t know how to plan for retirement, and 
• 22% don’t know what a good amount to have in their pension is or how to manage it, a figure that increases to 40% for Gen-Z adults aged 18-24 years old.

So, where should employees start? If they have a workplace pension, it’s tempting to think the automatic enrolment contribution rate might be appropriate – but it’s unlikely to be right for everyone. One way to start working out how much to save is to look at how much is needed to achieve a decent standard of living in retirement.

What is a decent standard of living in retirement?

Employees are likely to have their own views, depending on what they’re used to in their working life. However, a good measure of a decent standard of living before retirement is the real Living Wage. This is a UK wage rate voluntarily paid by employers who believe their staff deserve a wage that meets everyday needs – like the weekly shop or a surprise trip to the dentist.

The Living Wage Foundation provides accreditation to businesses paying the Living Wage. It encourages all employers that can afford to do so to make sure their employees earn a wage that meets the costs of living, not just the government minimum.

So, if there’s a Living Wage, it stands to reason there could be a pensions equivalent. To understand what it could be – and whether it’s feasible, Aviva commissioned the Resolution Foundation (the organisation that calculates the real Living Wage) to carry out research to calculate a Living Pension.

What does it take to build up a Living Pension?

Known as Building a Living Pension, the research examines how much income is needed to deliver an adequate standard of living for people throughout their retirement. It uses a range of factors to model this, from the basket of goods for basic living standards to the growth in pensioner living costs over time. It also takes into account changes in home ownership and life expectancy.

The research found a significant variation in minimum income needed in retirement, ranging from a weekly income of £209 for a single homeowner, to £445 for a couple in private rented accommodation. Achieving these retirement income levels would, on average, require a final pension pot of around £70,000 on top of the state pension.

The report goes on to calculate the level of pension saving required to meet these minimum retirement income standards, which vary significantly by workers’ current age. Here’s what two workers would need as an overall pension contribution rate –employer and employee contributions, plus tax relief – to reach their Living Pension target on retirement:

• A worker aged 25 today would need a contribution rate of 11.4%, equivalent to saving £2,100 a year if earning the Living Wage 
• A worker aged 35 today would need a contribution rate of 14.0%, equivalent to saving £2,600 a year if earning the Living Wage

Despite the variation in the minimum income needed in retirement, the Resolution Foundation concluded a Living Pension accreditation standard is feasible.

You can help make the Living Pension a reality

The Living Wage Foundation now has the task of building that standard and has started a project aiming to establish a Living Pension accreditation standard.

The Living Pensions steering group is supporting the Living Wage Foundation in driving forward this programme. It’s made up of experts across the financial services sector – including Aviva –with particular focus on workplace pensions.

Over the next year, they will bring together a set of recommendations based on these insights for how they might deliver a Living Pension accreditation following a pilot programme in 2022.

To support this work, they are seeking insight and feedback from employers, and experts in the pension sector, as well as talking to workers and retirees. You can feedback your views at this website.

This is an important initiative, which could help significantly improve UK pension outcomes for everyone.

With that in mind, please do all you can to provide feedback to the Living Wage Foundation to help them make sure the Living Pension is as successful as possible. Your employees could end up reaping the benefits.