UK occupational pension assets grew 16.9 per cent over 2017 to cement Britain’s position as the second-largest market in the world, but concerning trends in saver attitudes suggest market returns may be masking fundamental problems.
Ending 2017 at an estimated £3.11tn in assets, UK retirement savings grew faster than the global average of 15.3 per cent over the last year, according to a survey by consultancy Willis Towers Watson.
However, its 10-year growth of 1.5 per cent is among the worst pension economies in the study – global pension growth averages 3.2 per cent annually over the same period.
We know 8 per cent isn’t enough, we know that the 2 per cent people are paying in at the moment definitely isn’t enough
Nathan Long, Hargreaves Lansdown
This disparity between long and short-term trends is largely due to the distorting effect of recent market returns, according to Roger Urwin, global head of investment content at Willis Towers Watson.
“The bigger part of the one-year figures for the UK is that they have had very good investment returns, particularly in their equity allocations,” he said.
Over the longer term, asset growth in the UK has been hamstrung by the net savings loss brought about by the replacement of maturing defined benefit pensions with less generous defined contribution assets, he said.
Misguided faith in property
Against this backdrop, consumer faith in UK pensions appears to be somewhat shaky.
A survey on saver attitudes released on Monday by the Office for National Statistics found that while consumers see pensions as the safest form of retirement provision, they continue to doubt their efficiency.
Forty-nine per cent of savers questioned by the ONS thought that property would make the most of their retirement money, an opinion that has become steadily more widely held in recent years.
This attitude is unlikely to be shaken unless property markets see a downturn, according to Nathan Long, senior pensions analyst at investment platform Hargreaves Lansdown, and it is problematic given savers’ emotional attachment to their homes.
There is a distinct cohort of consumers, those who missed out on DB provision but are too old to benefit from auto-enrolment DC, whose best plan for retirement might be to downsize their property, he said.
“The appetite to downsize just isn’t there, because that’s not a logical decision, it’s an emotional one,” Long explained.
The introduction of auto-enrolment and saving by default means many of the would-be property investors contacted by the ONS will now be saving.
However, the rates at which they accumulate those savings are still too low.
“The problem you’ve got is that we know 8 per cent isn’t enough, we know that the 2 per cent people are paying in at the moment definitely isn’t enough,” he said, adding that government should nonetheless observe the impact of contribution hikes on opt-outs before legislating for new increases.
Could schemes be better run?
One way to reaffirm consumer faith in pensions could be to improve the standards of pension scheme governance.
The Willis Towers Watson survey predicted that schemes would improve their efforts on environmental, social and governance issues over the next five to 10 years, and would be more diverse and efficient decision-makers.
But Richard Butcher, managing director of trustee company PTL and chair of the Pensions and Lifetime Savings Association, doubted whether these changes would have a meaningful impact on saver confidence in pensions.
UK has lowest net replacement rates of average earners in OECD
A report has highlighted markedly low replacement rates for UK savers amid increasing pensioner poverty due to ill health, emphasising the importance of increased saving into private pensions.
“Nobody says, ‘I’m not going to join the pension scheme because they aren’t managing their ESG risk',” he said, and noted that the concern whipped up by the media over corporate failures was more likely to rock faith in generous DB arrangements.
No news is good news
Changes that will have an impact on pension saving will instead be those made at a national level.
“I think it’s a good idea to put the auto-enrolment rates up, and it will still be too low when it goes up,” he said.
Butcher added that the diminishing trend for property ownership means using property wealth to fund retirement will be an option for an ever smaller number of people.
The best thing for pensions in the UK might be a lack of change, according to Urwin. He said the consolidation brought about by the move to DC was welcome, and said he hopes policymakers will take their eyes off pensions.
“With the government having to work its way through Brexit, pensions has been taken off the front burner.”
