People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK has said in a report published today.
The report entitled 'The global savings gap' surveyed the pension systems of 30 high income countries and regions.
Amid stagnant wages and the highest ever levels of student debt, it found young workers in the UK need to somehow save 18 per cent of their salary each year in order to have an “adequate retirement income”.
Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.
The ILCUK warned that young workers would need to save an even higher amount — 20 per cent — to achieve the same level of retirement income enjoyed by today’s pensioners.
However, over 30 per cent of people between the ages of 25-44 make no savings whatsoever.
This group is particularly vulnerable, and unless they can accumulate some private savings over the coming decades, they are likely to go into retirement with extremely inadequate incomes, warned the report.
Only 12.4 per cent of people in the UK are currently saving more than 15 per cent of their earnings for retirement, leaving the majority of people in poor standing to achieve an adequate retirement income.
The UK pension system is only “middle ranking on adequacy and intergenerational fairness” when compared to other high-income economies.
Commenting on the report, Dean Hochlaf from ILC-UK said: “The combination of persistently low returns, sluggish wage growth and a changing labour market means today’s young people will need to save more to enjoy their retirement.
"The government must do more to extend pension coverage and ensure that contributions towards private schemes are sufficient, especially amongst overlooked groups such as the self-employed and those on low incomes who have yet to benefit from initiatives designed to improve private savings”.
Vince Smith-Hughes, a retirement income expert at Prudential, which sponsored the report, said: “As the ILC-UK analysis shows, action is needed now to further embed pension saving in to our workplace culture so that all, but in particular the younger, generations can look forward to a comfortable retirement."
Since 2012 some 8 million workers have been auto-enrolled into pensions in the UK.
At the moment, employers and employees are only required to contribute 1 per cent of an employee’s qualifying earnings, until April 2018 when employer minimum contribution rates will rise to 2 per cent with employees contributing 3 per cent.
By April 2019, employers must pay a minimum of 3 per cent of qualifying earnings per employee into a pension scheme with employees contributing 4 per cent with the government adding 1 per cent tax relief.
Employers need to repeat the auto-enrolment process approximately every three years.
To fully replicate the kind of pension which would have been enjoyed by someone with decent service in a final salary scheme, according to the Royal London policy paper 'The Death of Retirement', today's new worker would need to work until they were 77.