The figure 0.7 per cent. is derived from expressing the estimated cost of minimum employer contributions, £2.8 billion, as a percentage of total labour costs.
These figures were estimated using the Employers Pension Provision Survey 2005, Small and Medium-sized Enterprise Statistics 2005 and Annual Survey of Hours and Earnings 2005, as set out in paragraph 4.96 of the regulatory impact assessment.
Details on how the DWP’s estimate of seven million undersavers was derived were published in annex A to the White Paper, Security in retirement: towards a new pension system, in May 2006. The DWP estimates are based on a new data source, the English Longitudinal Study of Ageing (ELSA), which was not available to the Pensions Commission, but the same benchmark replacement rates. ELSA collects information on pension wealth accrued to date, and is the best data source available at present.
The annex also outlines two major reasons for differences between the two estimates. The DWP estimate is based on household level data, while the Pensions Commission’s figures are based on individual level data. (This means that an individual with a low pension themselves but whose spouse has enough for both would be counted by the Pensions Commission as an undersaver but not in the DWP’s estimates.) The Pensions Commission looked just at pension wealth, while the DWP estimates include other financial assets, non-owner occupied housing wealth and business assets.
Estimates of the current level of undersaving for retirement are difficult to construct due to: difficulties identifying appropriate saving targets; uncertainties about which kinds of wealth and asset to take into account; difficulties projecting individuals’ future saving and working patterns, particularly around choice of retirement age; and reliance on a range of other uncertain assumptions, including the impact of future macro-economic developments. Consequently such estimates should be treated cautiously.