Averting a pensions crisis
Less than three weeks after winning the election, the Labour government had announced a new pensions review, promising that it would look, among other things, at ‘retirement adequacy’.
With pensioner poverty on the rise and the financial prospects of future generations of retirees looking worrying, this is a timely and important exercise, writes Catherine Foot, Director of Phoenix Insights.
As outlined in State of Ageing 2023/4, relative pensioner poverty rates in the UK are nearly 18%, almost the same as pre-pandemic when they were at their highest since 2006/07.
And what of the prospects for the next generations of pensioners?
Recent analysis by the Department for Work and Pensions (DWP) estimates that around two in five (38%) working age people (12.5 million people) are undersaving for retirement (as measured by the percentage of income an individual needs to replace to have an ‘adequate’ income in retirement - assumed to be 67% of pre-retirement earnings for a median earner).
If you ask people themselves what retirement income they’re expecting, the picture looks even worse.
In a research project we carried out at Phoenix Insights with Frontier Economics, we modelled the retirement income prospects of more than16,000 pension savers over 25.
We found only one in seven savers in defined contribution pensions were on track for a retirement income that wouldn’t mean a material decline in their standard of living.
Whichever way you measure it, there is an undersavings crisis in the UK with millions of people at risk of a nasty shock when they retire.
It’s a crisis former pensions minister Sir Steve Webb has described as “a slow-motion car crash we’re all in the middle of”.
So what sorts of measures does the government’s retirement adequacy review need to focus on to try and avert this crash?
One is auto-enrolment (introduced in 2012) in which many workers are automatically enrolled into a workplace pension scheme, with employers and employees sharing a total minimum contribution of 8%.
It has been a fantastic success story, with the pension participation rate among employees jumping from about 50% to 75%.
As one of the Centre for Ageing Better’s Experts by Experience put it:
I looked a couple of times to get a personal pension, but I just couldn't afford it so auto enrolment was one of the best things they actually ever did because it then gave people some sort of a cushion.
The problem is, it just isn’t enough.
The assumption was that the policy would create greater engagement in pensions and that people would feel motivated to save more.
But the reality is that the 8% default is very ‘sticky’ – most people just stick with it.
And meagre real wage growth over the past 15 years, combined with a state pension that, while protected by the Triple Lock, is still one of the lowest in the OECD, means that that the average person simply doesn’t have enough for a decent retirement income.
In 2023, Parliament passed a bill to lower the minimum qualifying age for pension auto-enrolment from 22 to 18 and abolish the lower earnings limit for contributions.
This will support people to save more and help future generations start their pension saving sooner.
However, we are currently waiting on a plan for implementation.
There is growing consensus that we also need to increase the level of the minimum contribution from 8% to 12%.
In implementing these changes, the government will need to carefully determine how to support low-income households transitioning to lower take home pay.
We also need to get better at getting good information into people’s hands about their pensions, in ways they can understand and act on.
A qualitative research project carried out by Ipsos for DWP characterised people’s attitude to workplace pensions as one of “detachment, fear and complacency” while a poll from Aviva discovered that people prefer vacuuming to opening their pension statement.
As one Expert by Experience network member put it:
I don't think that many people, and I'm certainly one of them, has any idea how what the state pension gives you when you retire and that it varies so much.. I'm still someone who's completely uneducated about the state pension. Even though I'm in my 50s and one of those people who has blanked it out.
Becoming more knowledgeable and engaged in your pension is important to ensure you are saving the right amount for you,.
But it is also important because defined contribution (as opposed to final salary) pensions mean you now bear a huge personal responsibility for getting your pension pot to last your whole retirement.
It’s also critical for the increasingly large proportion of people who are self-employed, and so miss out entirely on the benefits of employer pension schemes.
This Expert by Experience would agree:
Whereas if you have that information that says, right, when you retire in 10, 15 years or whatever it is, this what the situation is going to be and those rules will apply to you, you can plan with certainty.
Increasing access to good quality, useful information and support requires multiple initiatives, from the ‘Pensions Dashboards’ in development that will make it easier to see all the pensions we’ve collected over our working lives in one place, to regulatory changes currently under review to make it easier for pensions firms to provide more personalised information.
And we’ll need more creative methods too, like Greater Manchester’s campaigns to promote pension credit where they worked closely with housing associations and printed messages on pharmacy prescription bags to spread the word.
Pensions may be boring and scary and feel far away. But if this government doesn’t act, the current creeping rise in pensioner poverty will accelerate.
I’m delighted they have committed to a review of adequacy in retirement, and hope they have the political will to make the changes we urgently need.
State of Ageing 2023-24
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