We recently published our white paper What can the UK do to ensure future retirement adequacy?, which looks at the challenges of saving enough for retirement within a defined contribution (DC) environment. Whilst we’ve only recently published our paper, it’s clear from the response that this is a topic that resonates with many of you; individuals thinking about their own retirements, employers providing benefits that attract and retain as well as help with workforce planning, policymakers grappling with how and when to make change, and political parties approaching manifestoes.
We want to take this conversation further and delve deeper into the topics raised. In the first of a mini-series exploring the key themes of our paper, we recap on what the issue is and what can be done to support individuals across the UK achieve a secure and more adequate future.
Analysis from the Pension and Lifetime Savings Association (PLSA) shows that the UK is facing a retirement adequacy problem, with 70% of families at risk of not achieving a ‘moderate’ standard of living in retirement. Our paper provides more about the Retirement Living Standards and the analysis WTW has carried out.
This will have consequences for individuals, employers and society and whilst automatic enrolment has increased the number of people saving in workplace pensions, provision as it currently stands is not enough.
When thinking about the challenges that face future retirees, it’s important that we acknowledge the shifting landscape:
What we’re also seeing is that journeys to retirement are often no longer linear; both in terms of the time spent saving and the transition into taking retirement benefits. It’s not unusual for individuals to take time out of the workplace for things such as childcare, elder care or career breaks, resulting in fragmented pension savings and contributing to the very real issue of under-pensioned groups. An issue we must look to address. And when the time comes to take retirement, it may not be a ‘one and done’ decision, with many individuals phasing into retirement by working part-time, returning to the workforce, or moving into a different occupation altogether.
Taking these changes together with the PLSA’s retirement living standards, which illustrate how much an individual might need in retirement, we can clearly see a need to take action to address the future needs of retirees. At a glance, we believe these actions include:
Automatic enrolment at the current levels is not sufficient to ensure retirement adequacy for all. The framework is built on inertia, with default contribution levels, default investment strategies and default retirement ages. Whilst this has been effective at getting people into workplace savings, we need to work harder to ensure these defaults support adequate outcomes.
There is a risk that individuals will take the default for granted and assume it will give them the outcome they need at retirement. Our modelling shows that a median earner contributing at the default contribution level throughout their entire working life is unlikely to reach a moderate level of income under the PLSA living standards.
Tackling this means policy makers, trustees and sponsors taking action. By working together and taking the necessary steps to address retirement adequacy, we put individuals in a better position at retirement.
Our paper highlights three key actions to deliver better outcomes for DC pension savers:
Save more
The industry consensus is that higher contribution levels are necessary to achieve retirement adequacy. We agree that a move to a default of 12% under automatic enrolment would be a significant step in the right direction. We understand that cost pressures exist. By setting a default with the opportunity to opt-down to a lower (but compliant) level, we create the opportunity to alleviate these where needed. We consider this further in our next blog.
Maximise returns
The growth phase of investment strategies should be re-evaluated to maximise returns and ensure members are not missing out on potential growth. This means investing in higher risk assets for longer. When we’ve looked at ‘typical’ default investment strategies, these are often diversified during all phases of the savings journey. Is it really appropriate for individuals to be investing 20% in defensive assets when they’re 40 to 50 years away from accessing their savings? Whilst this might achieve some diversity and reduced volatility, we need to think about balancing this and taking account of opportunity cost risk, that is, the risk of missing out on growth potential over the longer term. This will involve a change in the approach to investment strategies to focus on growth and this should be supported by policy makers through guidance.
Make better retirement choices
Recognising the complexity of retirement decisions, providers, trustees, and sponsors can play a crucial role in facilitating access to advice or guidance for members. Providing direction and support in navigating retirement choices can significantly improve member outcomes. This may involve offering access to financial planning resources, retirement seminars, or personalised guidance/advice services and looking at the current tax-efficient approaches that exist to make this more cost-effective.
So, to wrap things up - the retirement adequacy problem in the UK requires urgent attention from trustees, sponsors, pension professionals and policymakers. While auto enrolment has been a step in the right direction, it is not enough to ensure a secure retirement for all individuals. Increasing contribution levels, rethinking investment strategies, and facilitating better retirement decision-making are key actions that can be taken to address this issue. By working together and implementing these measures, we can strive towards a future where retirement adequacy is a reality for everyone.
If you would like to understand retirement adequacy in your current pension arrangement and/or explore design considerations, we would be happy to discuss this with you.
Look out for our next article where we focus on plan design – how we can achieve better contribution levels and what can be done to support under pensioned groups.
