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Too little, too late – is UK pensions saving facing a climate change scenario?

27 July 2017

In his regular column for Professional Paraplanner, Mike Morrison, head of Platform Technical, AJ Bell, looks at the latest facts and figures and the current and future implications of our savings rate and returns on investment.

A few weeks ago we had a Report from the OECD on pensions in the UK (‘Pension Funds in Figures’). The report concluded with three things that would have a real detrimental effect on future retirees:

1. Increasing longevity

2. Consistently low interest rates

3. The collapse of defined benefit schemes and the move to defined contribution schemes (I think that this was originally meant as a structural point with the transfer of investment risk from employer to employee but I think that we can reasonably add the effect of DB transfers to DC to this as more people give up their guaranteed benefits ).

The ‘headline statistic’ was that someone buying an annuity today, having saved 10% of their earnings into a pension for 40 years, will get about half of the retirement income of someone who did the same 15 years ago.

I recently read a headline about new figures from the Office for National Statistics (ONS) showing that the savings ratio in the UK has fallen to a record low – 1.7% in the first quarter this year decreasing from 3.3% in the previous quarter. At the same time the UK economy grew by 0.2%.

The data from the ONS comes with a few ‘reasons’, in particular that of real income falling and inflation on the up meaning that people cannot save as much but continue to spend to maintain the status quo. How can the savings ratio be so low when we have been heralding the success of auto enrolment, with more than 7.5 million now auto enrolled into workplace pension schemes?

For these people saving levels are low, little more than a minimum and consideration must be given to increasing contribution rates to a level which will provide a reasonable level of pension in the future. The fear is that larger contributions could cause more opt outs as the squeeze creates even more pressure to spend rather than save.

At the other end of the scale more people are put off pensions by the perceptions of limited contributions (a lifetime allowance, an annual allowance and even a taper on that) and confusing ever-changing rules.

All of this has not been helped by low interest rates (coincidentally as I write we are ‘celebrating’ ten years since the last interest rate rise) and the need to take risk to achieve some investment growth.

The final part of the jigsaw is longevity and to address this we have had not one but two state pension age reviews. Although published before the general election, any response was put on hold pending the election and, post-election, this seems to have disappeared along with any type of long term policy for the future.

At a recent conference, the author of one of the state pension age pension reviews, John Cridland, likened the ageing population to climate change with the possible effect on future society and the fact that more and more people will rely on what they get from the State. The state pension age is a limited tool and can only rise so far and the idea of a workforce of predominantly 60 and 70 year olds is concerning to say the least!

In a nutshell, we need to save more, for longer and expect the state pension age to rise ever further.

The other factor that will have an effect is the assumption that those people 15 years ago who bought an annuity, if alive today, should still be receiving the guaranteed income from that annuity – of the similar group today, how many will buy an annuity and have that certainty?

Many argue that climate change was addressed too late and the action taken was too little – let’s make sure that the same can never be said about the ageing population and saving for the future.







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