Pensions Conference 2012: Review of Workshop E2 - Estimation of retirement adequacy targets from income and expenditure data: how much is enough?

A replacement ratio at retirement as high as 75% is expected to be inadequate for one in four UK households

Megan Butler of the University of the Witwatersrand (Johannesburg) presented the results of her research into retirement adequacy targets in South Africa and in the UK.  The research involved using available survey data to project future required consumption in retirement, allowing for medical costs, food, outstanding mortgages etc (but not leisure and holidays as these are non-essential), and thereby estimate the required net replacement ratio for each person at retirement.  A typical adequate replacement ratio that is often quoted is 2/3.  However, the study showed that even a 75% replacement ratio was expected to be inadequate for 25% of UK households, which increases to 94% of UK households if the BSP was discontinued.  Given that the vast majority of UK pension schemes target a much lower replacement ratio than 75%, the study suggests that people will need to save considerably more and / or obtain money from other sources in order to meet their requirements and achieve an adequate income in retirement.  This represents a considerable challenge and raises the question of to what extent actuaries can and should play an active role in ensuring these messages are communicated to the population in order to enable them to take action before it is too late.