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Automatic Enrolment Report 1: What level of pension contribution is needed to obtain an adequate retirement income?
This is the first report in a series of research reports that investigate the potential impact of auto-enrolment into private pensions on individuals and their levels of pension saving but also on the shape of the private pension market.
This particular report analyses the range of retirement incomes various individuals might achieve from making the minimum required level of contributions to a Defined Contribution pension. It also analyses the contribution rate necessary for different individuals to have a “good chance” of achieving an adequate level of retirement income. Finally the report compares the contribution rates necessary to achieve adequate retirement income levels with current contribution levels and discusses to what extent there is an adequacy gap.
Chapter one discusses the main approaches to measure adequacy such as poverty thresholds, minimum income standards and replacement rates. The chapter then discusses the main factors affecting retirement income from DC schemes such as the contribution rate, the history of contributions and the investment strategy followed during the accumulation phase.
Chapter two sets out the methodological approach used throughout this report to measure retirement income adequacy. The chapter then analyses the distribution of private pension outcomes and the probability of achieving the target replacement rate with income from private and state pensions for individuals with different characteristics, if contributing at the legal minimum of 8% of band earnings.
Chapter three analyses the contribution rates that would be necessary to achieve a two-thirds or three-quarters probability of reaching an adequate retirement income.
Chapter four compares the contribution rates necessary to achieve adequate retirement income levels with current contribution levels. The chapter discusses to what extent there is an adequacy gap.
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