Over the last 12 months we have partnered with Nest Insight on new economic modelling to understand the trade-offs between day-to-day expenditure and long-terms saving needs that UK households face. We have explored 30 different modelled personas over their life courses, and created theoretical optimised saving approaches for each one. From this we have created sharable lessons for households in similar positions as well as for our pension system as a whole in this report.

In this blog, we talk to Matthew Blakstad, Director of Analysis and Governance at Nest Insight, who led the research, about the key findings and takeaways.

Q1 Why is it currently difficult for savers to decide how much they need to save for retirement? What benchmarks are available to help them set a saving goal?

There are any number of reasons why it’s hard for someone to choose the ‘right’ level of pension contributions. But from a policy perspective, some of the most important ones are:

• Pension contributions and incomes happen at the individual level. But living standards are defined by the financial make-up of the whole household. So when you’re trying to set your own personal formula, based on your earnings from work, but the problem you’re trying to solve is usually to give your whole household a consistent standard of living through your working life and into retirement.
• Which leads to the second challenge: the future is uncertain. Even if someone could set the perfect plan to suit their current family set-up and to prepare for their plans for things like home ownership and career development, none of these things are, set in stone. For instance, someone who’s expecting to share their spouse’s savings to fund a joint lifestyle in retirement will need to have a significant rethink if they were to separate.
• All of this makes this question hard for an individual to solve. But when you zoom out and try to design a retirement savings system that meets the needs of a large population of people, you face the most fundamental challenge, which is that every household is different. Two individuals with exactly the same labour income might have completely different household sizes. One might have substantial existing savings and a mortgage, while the other might be in the opposite situation. Their optimal savings rates are going to be completely different.

Q2 Could you tell us who the 30 model savers in the research are and how they were chosen?

We created our 30 saver personas to bring to life these household-to-household differences. We’ve used them to understand in depth the kinds of trade-offs different people need to make when deciding how much of their incomes to put away for retirement.

The personas are essentially fictional but highly realistic portraits of 30 individuals and their households, told through data that we’ve gathered from the Understanding Society household panel study. We used these rich, longitudinal data to build an in-depth portrait of each persona, tracking over their entire working lives things like their incomes and expenditure, and the role that things like parenthood and other caring responsibilities play in their lives. These rich data have allowed us to look at pension savings through two dimensions:

• What kind of spending power they can achieve in retirement at different rates of saving
• How much financial capacity they have during their working lives to put away money for retirement.

We thought it was important to take this deep and specific approach, rather than just looking at the high-level statistics on UK households as a whole. It’s allowed us to see in a really granular way how pensions savings priorities interact with every other aspect of a household and its finances.

Q3 What are the key observations in the optimised saving journey for these savers?

To help understand the savings priorities of each of our personas, we asked our model to calculate optimal retirement savings rates for them over each decade of their working lives. The model tries to achieve two things at once:

• Smooth the spending power of the whole household throughout each persona’s life course.
• Prevent the cost of their retirement contributions taking them below accepted standards of living in working life.

At a first analysis, the main thing we learned from this process is that everyone is different, and so they have different recommended savings rates. A very small proportion of our personas appear to be on the right track by continuing to make contributions at the default rates set in the auto-enrolment system, but for most the model suggests contributing more, or less, than they currently are. This depends on a range of factors that contribute to their levels of disposable income, and their financial priorities.

Even more striking is the number of individuals who are recommended different levels of contributions at different stages of their lives, due to ever-changing household circumstances.

However, when we dig beneath this diversity, patterns begin to emerge. In general, we can see that:

• Above-median earners can face sudden drops in spending power at retirement. But they may have other ways to fill these gaps.
• People earning just below the median would benefit from saving more, but their priorities depend on the make-up of their households.
• People earning below the full-time national living wage can face financial pressures in the present that make it less clear-cut they should contribute more for the future.

Q4 We looked at households rather than individuals in this research. How did that change the recommendations for savers and what can we learn from using that approach to measure adequacy?

Ultimately, decisions about pension savings relate to the individual. As I’ve mentioned, if an individual relies on a wealthier partner to fund their retirement, they may face an unpleasant reality should their household break down in the future and they have to rely on their own savings. But the case we’re making in our report is that we need to think of this challenge with a wider lens.

Ultimately, the reason anyone saves for the future is that they want to smooth their living standards over the periods where they’re earning, and the times when they’re not. A narrow focus on saving enough to achieve a given living standard in retirement tends to ignore the living standards an individual is facing in the present day. Hence our focus on the trade-offs that are involved in putting money aside into a pension, and so making it unavailable for financial priorities in the present.

So pensions relate to the individual, but living standards happen at the level of the household. And our approach allows us to take both these things into account. It helps us take a wider focus on helping people maintain their overall financial resilience across a lifetime, rather than prioritising pensions saving at all costs.

Q5 How can policy makers, trustees and pension providers make use of these findings?

There’s a broad and a narrow way of answering that question.

The broad answer is that pensions policy-makers should try to make decisions as part of a wider strategy about maintaining people’s life-long financial resilience. For instance, there are very strong arguments to increase the rate at which people are saving in auto-enrolment pensions. But if this is done at an increased cost to the individual worker, it’ll be important to consider the knock-on effects this will have on many savers. This is especially true given the ‘stickiness’ of auto-enrolment contributions – the vast majority of people tend to save at the rate at which they were first enrolled.

This is why we think it’s important to consider options like differential contributions based on earnings, or the option for lower earners to cease contributions without losing out on employer contributions. It’s also why we believe that an automatic savings system should incorporate some element of accessible savings, to maintain people’s resilience to financial shocks as they build their long-term asset.

The narrower answer is that employers and pension scheme managers should take their participants’ ages and incomes into account when designing and communicating their arrangements. Although they will never have sufficient data on members’ household circumstances, or their wider financial realities, our saver personas demonstrate that people’s savings priorities differ depending on their incomes; and these priorities change over the life-course.

Our report contains some suggestions for how policy-makers, employers and schemes might take some of these findings into account.

Based on the findings from this project and our work so far, Phoenix Insights recently published a set of policy recommendations for the government’s upcoming pensions adequacy report.