The gradual introduction of pension auto enrolment and the forthcoming reworking of the state pension system will alter the pension landscape in the years ahead. The DWP has been considering how it should gauge the impact of its measures on retirement incomes, something that you might have thought deserved attention a little earlier on in the reform process. The Department’s number crunchers have produced estimates of adequate retirement incomes as a proportion of pre-retirement incomes. The results are shown in the table below.
|Pre-retirement Earnings Band||Replacement Rate (%)|
|Less than £12,200||80|
|£12,200 – £22,400||70|
|£24,400 – £32,000||67|
|£32,000 – £51,300||60|
If the earnings bands look rather strange, it is because the DWP has taken a short cut in deriving the table. Instead of starting from scratch, it just copied the income replacement rate table produced by the Pensions Commission in 2004 and updated it in line with the growth in earnings. The average increase in each band of around 28% is less than price inflation since 2004, based on the RPI, but just about matches CPI.
The DWP calculates that on the basis of its proposed replacement rates, 12.2 million people are still facing inadequate retirement incomes, even after its reforms kick in. It says that “Roughly half of these [12.2m] are within 20% of their target amount, with the remainder facing a more significant challenge. This is a particular issue for moderate and higher earners.”