Redington's Rob Gardner says UK pensions policy needs to be decoupled from politics and a large-scale education programme put in place, to prevent the next generation facing financial hardship in old age.
The predicted cost of pensions is expected to rise to 8.6 per cent of UK GDP by 2050 from 5.5 per cent today. Total UK pension liabilities in 2014 were an eye-watering £7.1tn. My estimate is that they now stand at £10tn.
Let’s put those figures in perspective: total UK GDP was £1.9tn in 2014. The cost is around 100 times the NHS annual budget. It is vital to the health of our economy and society that we keep these funding levels in check.
We need to install an independent pensions commission with the power to make real long-term decisions, free from political interference
The brewing civil and societal problem is in the spotlight as Teamster retirees in the US rally to protect their pensions from much-needed restructuring.
The good news is that in the UK over the past decade, a number of pension funds have employed new tools and techniques to manage and control their assets, liabilities and risk. This has included liability-driven investing, diversification away from equities, liability management and buy-ins.
Some have adopted a new mind-set of risk-based allocation as opposed to the traditional asset allocation approach – and by applying these new tools and techniques, they are now on track to full funding and paying all their members. But, this new thinking must be the future for all defined benefit pension funds to avoid the fate of the Teamsters.
Empowering the next generation
But the challenge is wider than repairing our DB pension funds. My biggest fear is the pensions revolution lacks the fundamental roots to tackle the need to provide people with a secure pension and guide the next generation to a better financial future.
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To underpin the radical changes, we need to install an independent pensions commission with the power to make real long-term decisions, free from political interference, akin to the Bank of England. We also need to put in place a far-reaching financial education programme to build the financial capability of our children – tomorrow’s workforce.
The savings challenge for the next generation is not about investment returns and tax-efficient savings wrappers. It is about engagement and education. If George Osborne really wants to put the next generation first, we have to talk to them.
Don’t ignore it
We believe the 'EAST' framework can help foster positive savings habits. It means communicating to savers in a way that is Easy, Attractive, Social and Timely.
Easy – saving into a pension is easy
Attractive – you'll get extra money
Social – millions are doing it
Timely – start sooner, get more
This needs to be the language of the savings revolution. We all have a responsibility to engage our colleagues, employers, friends and family on the importance and need to save for their future.
Rob Gardner is a co-founder of consultancy Redington
