The pension sector has been warned that it needs to accurately define adequacy targets to ensure people avoid under-saving for their retirement.

The call has come from Hargreaves Lansdown which has warned that without clear adequacy targets, “we risk groups of people potentially receiving a nasty shock when they come to retire.”

Ahead of government plans to launch the next stage of its Pension Review, which will focus on adequacy, Hargreaves worked with Oxford Economics to assess how pension adequacy is currently measured, and how each measure works for different groups.

In a new report looking at ‘Pension resiliency benchmarks’, Hargreaves concluded that ‘pounds and pence measures’ - such as the PLSA and Living Pension estimates of retirement income needed for a decent living standard - can identify those at risk of missing minimum income targets but can be misleading for both higher and lower earners.

It said more relative measures such as Target Replacement Rates (TRR) and current retiree expenditure tend to see higher earners undersave.

Hargreaves recommended using TRR with an underpin of the Living Pension. The firm added that it would like to see ways of incentivising voluntary contributions explored.

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said: “It's a vital issue at the very core of long-term saving success. The government’s upcoming assessment of pension adequacy will form the basis of its long-term thinking around pensions. The future direction of auto-enrolment and the state pension needs to be based on a firm foundation of the reality for retirees today.

“Right now, there isn’t a common approach, and people are left in the dark about what they need to save. Using the wrong measure could give people either the false hope they are saving enough or the misplaced worry that they’ve fallen way behind.”

Hargreaves’ recommendations:

• A relative measure should be adopted, because these best reflect the income needs of different groups when moving into retirement. This should come with an absolute minimum income underpin.
• We recommend using Target Replacement Rates with an underpin of the Living Pension.
• The state pension plus automatic enrolment minimum contributions should absolutely meet the minimum underpin.
• Contributions may not need to be increased further for all individuals. This will be more of a concern for higher income households, who will need higher contributions as they target higher retirement incomes.
• We advocate exploring the opportunity to incentivise voluntary contributions by encouraging employers to boost their own contributions for those employees willing to increase theirs.
• There needs to be a common approach, across government and the industry, to communicate how individuals know they have reached a suitable retirement pot.