Voluntary saving is vital to avert poor pension outcomes

The Organisation for Economic Co-operation and Development's annual "Pensions at a Glance" report examined the pension systems of 34 countries to assess the likely replacement rates citizens would receive in retirement and the challenges faced in each country.

On first glance, it appears UK pension savers are in a good position, with an average replacement rate for full-career workers at 71 per cent, above the average 68 per cent for the OECD more widely.

For low earners the picture looks better still, with an average replacement rate of 99 per cent of individual earnings.

However, Mark Pearson, deputy director of the directorate for employment, labour and social affairs at the OECD, said the reality for many people would be far worse than the data suggested.

For example, without voluntary pension income from a workplace or personal pension, the replacement rate for average earners drops to 38 per cent. Low earners are hit less hard, but their replacement rate still drops to 69 per cent.

Pearson said: “All those assumptions assume that everyone has full careers… not everybody is in employment at any moment and certainly very few people who are entering the market today can expect to have a full career in the future.”

Source: OECD

The UK employment rate for 55-59 year olds is an average of 73 per cent, Pearson added, which decreases to 48 per cent for the 60-64 age group and 20 per cent for 65-69 year olds.

Source: OECD

While some countries such as New Zealand and Japan have higher levels of employment for older workers, health woes mean the UK could could find it harder to improve.

“The UK is going to struggle to get there because frankly our population is not healthy enough,” Pearson said, adding there was “a sufficient amount of evidence” to indicate the decline in health is more rapid in the UK than other countries.

Alongside this, the distribution of pension saving illustrates some key gaps. Research published last month by provider Scottish Widows showed women were more likely to be unprepared for retirement, with only 52 per cent deemed “adequate savers”.

An exacerbating factor for this is the fact women are more likely to work part time, at 18 per cent versus 6 per cent of men.

Another group at risk is the self employed. Data from the Office for National Statistics earlier this year showed in 2013-14, just 420,000 of the UK’s roughly 4.6m self-employed people were contributing to a personal pension.

Addressing this will be important to ensuring good pension incomes as the number of self-employed people grows.

Pearson said reducing the chances of a poor replacement rate “will require auto-enrolment is a success, it will require people to be in employment much more consistently or at least as consistently as they have been in the past – both of which are question marks”.

The coverage rate for private pensions in the UK is around 43 per cent, making the possibility of replacement rates coming in well below the OECD average very real.

Source: OECD

Triple lock unlocked?

The new state pension is indexed with the "triple lock" – a promise it will rise annually in line with the highest of prices, earnings or 2.5 per cent.

Pearson added those in retirement could find the triple lock applied to the state pension is scrapped in future, reducing the certainty of retirees’ purchasing power.

“The way the triple lock works is that the more variation in the economy, the more burden there is or the higher the pensions go up relative [to wages] just by design,” he said. “The fact we have the triple lock means we know the future will have ups and downs and those very ups and downs will take the system into the territory of increased burden.”

He added: “If things really tanked in the economy and we see wages falling, and yet we’re tracked into that 2.5 per cent increase, how long do you think [the government] would maintain it?”

But Pearson is not the only person to suggest the triple lock could be scrapped. The Pensions Policy Institute last year released a briefing entitled ‘The long-term cost and spending implications of the single-tier pension’, which suggested the government could remove the initiative.

A note accompanying the briefing said: “Because the requirement to uprate the new single-tier pension by the “triple-lock”... is not included in legislation, future governments could revert to increasing the state pension in line with earnings and significantly reduce the cost of the new single-tier system over the longer term.”