Rome wasn’t built in a day: Neither is a pension

‘All roads lead to Rome’, so the saying goes. With Rome itself experiencing a heated cauldron this summer, this is an apt analogy when it comes to the hot topic of pension contributions, with many pensions authorities and finance industry commentators collectively and repetitively urging that something has got to be done to get more people saving enough for a decent retirement life. 

The current situation is stark, as the Institute for Fiscal Studies pointed out. They report that 82 per cent of private sector pension scheme members have pension contributions of less than the 16 per cent of earnings suggested by the Pensions Commission as the appropriate retirement saving level. The percentage is higher - 87 per cent-  for ‘middle earners’, who, in theory, can afford to put more away for the future, albeit there’s a cost of living crisis going on right now. 

And there’s this: over half - 53 per cent - of private sector employees with a workplace pension have total contributions of less than 8% of total earnings, and 17 per cent have less than a seriously low five per. Understandably, the proportion of people with low contribution rates is much higher among low earners, but even for middle earners, a massive 61% have contributions of less than 8% of earnings. 

Meanwhile, the FCA’s latest Financial Lives survey (2022) found that 72 per cent of people earning £30 to £50k are contributing to a pension, yet 30 per cent did not know how much they had saved in their pension - and when pushed to say if they thought it was more or less than £10,000, 12 per cent still couldn’t say. Among those surveyed, one comment sums up the lack of consumers’ grasp of pensions: “I wish I had put more effort into understanding financial products and services in my 30s so I could have done more with my income in terms of investments and lending. Like many folks, I only looked at it in any detail in my 50s as retirement appeared on the horizon!” (Male, 55‑64). 

These data points have set off a giant alarm bell dinging us from the future. 

The inevitable advice gap problem 

People with these low contribution rates would benefit from professional advice, which would help them do what they can to save and invest more for later life. However – no surprise here – such advice comes with fees not affordable for many pension scheme members. Hence the lang cat consultancy reports in its 2023 Advice Gap paper that only 11 per cent of GB adults have paid for financial advice in the last two years. We’ll come back to this unaffordability problem in a moment. But first, some other helpful facts. 

When it comes to taking income in retirement, the pension freedoms introduced in 2015 and auto-enrolment that entered the frame in 2012 has brought about a situation where the ‘freedom’ of flexi-access drawdown is unlikely to be suitable for many people. This is because most pension pots grown just via auto-enrolment contributions probably won’t be large enough to make this drawdown suitable as the main source of long-term retirement income. 

EV’s recent hybrid and digital advice white paper mentioned the Pensions Commission’s estimate that 38 per cent of the working-age population is not projected to save enough for an adequate retirement income. And the Department of Work and Pensions found in 2021 that the average annual pension contribution for those in the private sector was £2,110, which is about £175 a month, thus just under seven per cent of the average weekly pay of £598 as per Office for National Statistics data. 

 What this equates to is the proliferation of low-value pension pots. Moreover, the ABI has estimated that by 2030, there will be a massive 22 million small inactive pension pots – those worth up to £10,000 – owing largely to people changing jobs a number of times and being enrolled in a different scheme with each job move. Another problem with pensions that is crying out to be addressed so workplace savers can better understand their prospects in retirement. 

 Fixing the problem for the adrift majority 

 That’s a lot of facts and figures, but the point is all roads are leading to a crisis in pensions as the decades unfold. Given the advice gap, i.e. the inability of many to afford professional advice that would help get their pensions back on track to provide for a reasonable lifestyle in retirement, the number one issue is surely what can be done for the unadvised majority. 

The FCA is looking into the advice and guidance boundary, so we’ll see what comes of this in due course. Right now, I think pension scheme members in the workplace should be given access to easy-to-use digital guidance tools enabling them to look at their pension arrangements and grasp the different financial outcomes they are likely to experience depending on the level of contributions they make from here on in. Such tools exist already and can be woven into employers’ benefits portals. Hopefully, when the pension dashboards materialise by 2026, people can locate forgotten pension pots and perhaps consolidate them for their long-term benefit. 

Helping large numbers of people get their pension contributions into better shape should certainly happen sooner rather than later. In the absence of a magical financial windfall that many of us yearn for in tough times, whatever the weather - economic or otherwise - it’s true that every year that passes without saving adequately in a pension makes the prospect of later life less financially rosy. 

Ashley Staples is product director at EV