Talking Head: This week’s NAPF conference is one of the industry’s greatest opportunities for debate, and the central question must be: Can we use the energy of debate to power a collective response to an unprecedented pensions crisis?
Rapidly changing demographics and a massively underfunded defined benefit legacy need to be addressed holistically and collectively. We are no longer in a position where these problems can be dealt with in isolation.
In the UK, baby boomers are turning 65. This means the largest generational group is retiring when our DB system is in dire straits; the deficit on a buyout basis is £700bn – greater than everyone’s wages in the UK combined.
The second headwind we face is Generations X and Y’s apathy to saving. They have a YOLO (you only live once) mentality – why save for tomorrow when you could spend today?
Meanwhile, economic uncertainty and austerity has led to the decline of state and DB pensions.
If we do not do something radical we face a pensions time bomb – think ‘The Retirement Games’: a future society divided into those who have money in retirement and those who do not
Think 'The Retirement Games': a future society divided into those who have money in retirement and those who do not
People simply are not saving enough
The savings ratio is too low at around 5 per cent, when we know it needs to be more than 15 per
cent. Generation Y has a savings ratio of minus 2 per cent.
Those born today have a 50 per cent chance of living to 100. As a result, our dependency ratio is falling from nine-to-one 100 years ago to three-to-one, and then two-to-one.
In 2016, 20 per cent of the UK’s planned public spending will be on pensions – £153bn more than healthcare. The state pension will cost more than £90bn. The net present value of this promise exceeds £6tn.
DC needs to raise commitment without scaring members
DC could fail to deliver adequate retirement incomes unless contribution rates are driven up while keeping members on side
With current bond yields, the cost of a DB pension – two-thirds of your final salary, inflation-linked until you die – is prohibitively expensive.
Inconvenient truths
The pensions industry has underestimated longevity. It has overestimated the return on equities. It has been wrong-footed
by the decline in yields. It has paid high fees for active management when the five-and 10-year track records have been poor.
We must apply investment strategies that will manage downside risk effectively – this means using a different set of tools and techniques.
We also need to develop financial education with our young people. The onus on young savers to provide for their pensions has never been greater.
It is critical to boost contribution rates if we are to disarm the pensions time bomb.
Nick Clegg recently remarked that governing compels you to confront the inconvenient truths the opposition chooses to ignore. This is a maxim the pensions industry would do well to remember.
Rob Gardner is co-CEO at Redington
