Low engagement, savings levels and productivity are all negatively affecting the ability of future generations to secure a comfortable retirement, according to Mercer.
A growing pension saving gap is expected to reach £25trn by 2050, Mercer said, citing data from the World Economic Forum. This represents a massive shortfall between savings needed and actual capital available to provide a secure retirement for the UK’s “rapidly ageing population”.
Just 3% of millennial households – those aged in their 30s or early 40s – with a median income are expected to reach a “moderate” retirement living standard, Mercer warned. This was based on the Lifetime Savings Initiative’s inaugural report, published earlier this year.
“Widening gaps in retirement income not only present challenges for individuals but also impose fiscal and political pressures for the government,” Mercer said. These included strains on welfare and healthcare systems as the population ages.
However, the consultancy giant highlighted that policymakers “have a golden opportunity to establish a proactive approach that sets us on a trajectory of secure outcomes and economic growth, rather than burdening future generations with mounting challenges”.
Road map to improved outcomes
Mercer set out a "road map” for addressing the core challenges facing the UK, including steps such as encouraging consolidation of pension schemes to improve efficiency, and increasing investment in productive assets – a core element of the government’s Pensions Review.
Mercer also reiterated calls for the expansion of auto-enrolment. It urged the government to consider including workers under the age of 18 and the self-employed in the scope of auto-enrolment.
Removing age and earnings limits could also bring nearly 900,000 young women into pension saving, Mercer’s report said, helping to reduce the gender pension gap.
“The complex regulations governing auto-enrolment currently act as a barrier to greater engagement, and simplifying these rules would be beneficial,” Mercer said.
Higher contributions would also help savings rates and investment goals, the report explained.
Previous research by Phoenix Group and WPI Economics has claimed that raising the minimum total contribution from 8% to 12% could bring an additional £10bn a year into the pension system, boosting pots and making more money available for long-term investment.
Separate research from Oxford Economics and Royal London has illustrated that higher contributions could lead to stronger economic growth, but could also have impacts on tax revenue, business costs or wages.
Mercer’s report supported higher contributions but also called for greater flexibility around savings pots, such as allowing limited withdrawals to help in “specific circumstances”. This would potentially reduce the likelihood of people opting out of pension saving altogether.
The government should also consider refocusing state pension policy to support those on the lowest retirement incomes, and align the regulatory regimes currently overseen by the Pensions Regulator, the Financial Conduct Authority and the Prudential Regulatory Authority.
Room for improvement
The UK was ranked 13 out of 47 countries in the most recent edition of the Mercer CFA Institute Global Pension Index, which ranks national systems on adequacy, sustainability and integrity.
While the UK received a relatively positive ‘B’ grade in the index, Mercer highlighted several areas for improvement – particularly to support the sustainability of the country’s pension system.
Phil Parkinson, UK head of wealth at Mercer, said: “We are slowly walking towards a cliff edge of challenges for pensions and long-term savings, but we have an opportunity to address these.
“In the UK, people are not saving enough to have a comfortable retirement, and the state pension will not provide the standard of living people expect. The cost of inaction now is likely to be borne by future generations.
“We are encouraged by the steps taken by the new government and welcome the Pensions Review. We now need to move quickly.
“To ensure people have a comfortable retirement, the government needs to expand auto-enrolment, address inequalities, and support productive asset investment to ensure everyone can enjoy a secure and comfortable retirement.”
Further reading
‘We need a consensus’: Sir Stephen Timms calls for higher contributions (17 May 2024)
Auto-enrolment contributions boost ‘could add £10bn a year’ (25 April 2024)
Third of workers seek to delay retirement over affordability (20 June 2024)
