Pension income in sharper focus as DC overtakes DB

20 June 2022

The number of people only paying into a defined contribution pension has surpassed those paying into a defined benefit pension for the first time, new figures from the Office for National Statistics have shown.  

Between April 2018 and March 2020, 26% of people were more likely to only contribute to a DC pension compared to a defined benefit pension (23%).

During the same period, more people below state pension age (57%) were actively saving for retirement using private pensions than before automatic enrolment was introduced in 2012 (43%). This growth was driven by more people, particularly private sector employees, paying into DC pension schemes.

Andrew Tully, technical director at Canada Life, said: “These figures confirm we have passed ‘peak-DB’ with more people now saving through defined contribution schemes, and over the next 10 years it is likely the majority of people approaching retirement will only have defined contribution savings. That brings the sustainability of pension income into sharper focus as many recent retirees have had a base of defined income to underpin their DC savings.

“Some of these retirees with only DC savings may wish to use part of their pot to purchase an annuity later in life to give an element of guaranteed income on top of the state pension.”

The figures also revealed a pension wealth gap, with the top 10% of the UK population holding more private pension wealth than the rest of the population combined. Almost a third of people do not expect to have any pension provision beyond the state pension when they retire.

Self-employed people were also shown to have lower levels of pension savings, with only 20% of self-employed people paying into a pension compared with 80% of employees. In addition, nearly two fifths (39%) of self-employed said they could not afford to contribute versus 26% of employees.

Jon Greer, head of retirement policy at Quilter, said: “Today’s ONS report paints a rather harrowing picture of the retirement outlook for a vast number of people and highlights the disparity in retirement savings across the nation, with a particular lack seen in those who are self-employed.

“What’s more, given this latest data covers to March 2020, it is likely that the results are more positive than would be the case had the impact of the pandemic factored in. Just prior to the pandemic, the self-employed made up about one in seven of the workforce. It is likely to have dipped through the pandemic but remains much larger than a generation ago driven by growth in self-employment in the decade after the financial crisis.

“The Institute for Fiscal Studies found that while employees have suffered from stagnation in their earnings, the self-employed have done much worse with incomes falling rapidly in the years preceding the pandemic. This may contribute to the fact that more self-employed say that they cannot afford to contribute to a pension relative to employees.”

While the challenges facing the self-employed are clear, solutions are less obvious. The idea of using the National Insurance system to allow people to divert money into a Lifetime ISA or a pension has been floated but Tom Selby, head of retirement policy at AJ Bell, warned that any such move would be controversial.

Tully said: “This would be a hard shove into pension saving, rather than a nudge, and would certainly be controversial. However, radical solutions need to be considered if a future disaster is to be averted.

“The self-employed are just one example of a pension problem requiring action – there are many more. Other groups, such as those with multiple low-income jobs, also risk missing out in retirement. Similarly, there will be people in their 40s and 50s who have missed out on the glory years of defined benefit pensions and don’t have enough time to build up a decent-sized defined contribution pot via auto-enrolment.

“Addressing these challenges will require big, bold, coordinated thinking from Government – and potentially warrants another Pension Commission.”

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