Pensions Expert 20th Anniversary: Retirement – however you define it, and whether we talk about funding it or when it starts for people – has undergone some significant shifts in recent years.
Long gone are the days when old age pensions from the state were seen primarily as a safety net against poverty and deprivation in later life.
The policy of increasing state pension age carries a substantial risk of people leaving the workforce before this age
We have also seen a substantial increase in the proportion of one’s life spent in retirement. Quite reasonably, this has raised important questions on how to finance a sustainable and suitable pension system for the future.
Fragmented work histories complicate the picture
Like other areas, the UK pension landscape has experienced some important transformations in recent years that further complicate the picture looking ahead. The previous pattern of a career job with a healthy defined benefit pension upon retirement is no longer the norm and certainly will not become so again.
Moreover, shifts in the labour market such as more diverse and fragmented work histories will have a substantial impact on how the pensions of different cohorts – as well as subgroups in these cohorts – will develop.
This reshapes how individuals, employers, and government need to think about pensions in the future, as we seek a balance between affordability and income adequacy in later life.
State pensions are becoming inadequate
ILC-UK recently published some research, entitled ‘The Global Savings Gap’, that looks at pension systems across 30 countries in terms of affordability, adequacy, and intergenerational fairness. It identifies what many might fear to be the case: nearly all countries will see inadequate retirement income for people reliant on public (and publicly mandated) pensions.
In addition, those entering the workforce today will need to save around 12.6 per cent of their earnings in order to enjoy the same retirement income as those already retired. For the UK alone, this goes up to 20 per cent of earnings.
Obviously, the current political climate in the UK does not lend itself to legislating for drastic increases in state pension provision. Such a measure would impact affordability, where the UK does fairly well in the international context.
Still, the paper points to a number of ways that we might support an affordable pension system that delivers adequate retirement incomes.
‘Nudging’ toward private savings
We need to see more people saving into private occupational pensions, but we must also ensure they are making sufficient contributions to these schemes. This can be facilitated by behavioural nudges, such as the rationale for the introduction of auto-enrolment.
There might also be scope for extending auto-enrolment through linking increases in earnings to increased contributions.
The main challenge here, however, is ensuring those with more diverse work experiences, such as the self-employed, are not left out.
Raising financial capability
As individuals are given greater responsibility for planning their retirement, they could benefit from improved knowledge around financial planning.
Personal preferences mean that products and services will need to be tailored for individuals; however, clear and accessible material that helps people more easily compare different products should be developed.
New advice models and good product defaults
Part of improving financial capability can be achieved by new models of financial advice that tap into technology to improve accessibility while remaining cost-effective.
Yet there will still be those who do not engage in planning their retirement; offering strong default options can help these people be adequately prepared.
Facilitating longer working lives
Staying in work is one option for people to improve their income adequacy for when they do retire. For example, people in the UK currently retire around the age of 63 on average; they will need to retire at 70, based on current savings, to eliminate the projected gap in retirement.
Billions to go backwards – now how do we move forwards?
Pensions Expert 20th Anniversary:FTSE100 companies paid £150bn into their pension funds over the past decade, but unlike in 2007, their accounts showed a deficit.
The policy of increasing state pension age, however, carries a substantial risk of people leaving the workforce before this age. Earlier ILC-UK work found that there are about 1m people aged between 50 and state pension age who are out of work but would like it if a suitable opportunity were available.
Reducing inequality in outcomes
There is growing research that demonstrates how pension outcomes can vary greatly depending on one’s personal work history. Extended periods of unemployment, inactivity, or low earnings will impact pension accumulation and retirement income.
To maintain affordability, there may be scope for more generous means-tested support to assist those who have been disadvantaged during working life.
Like many things in life, we need to find the right balance – in this case, between affordability and adequacy. A number of policy levers remain available for governments, employers, and individuals to ensure that everyone has the financial resources they need to live a fulfilling later life.
Brian Beach is a senior research fellow at the International Longevity Centre – UK
