Pensions and Lifetime Savings Association’s Graham Vidler shares his expectations for the pension world in 2017 and the next generation of pensioners
Fifty is the new 40, 60 is the new 50 and everyone is worried about funding retirement, or that is what the newspapers would have you think. For most people, the reality is somewhere in between. We are living longer and people are increasingly aware that the State Pension alone will not provide them with the retirement they aspire to.
At the Pension and Lifetime Savings Association (PLSA), we represent over 1,300 employee pension schemes with more than 20 million members – some of them local government schemes. This makes us the voice of pensions and lifetime savings in Westminster, Whitehall and Brussels with our main focus being on getting more money into retirement savings, getting more value out of these savings and helping to build the confidence and understanding of savers.
What does the diverse pension’s landscape look like at the moment?
Firstly, today’s pensioners are better off than any previous generation. A 30% increase in average incomes over the past 15 years alone. As incomes of working age people continue to stagnate, there is now some evidence to suggest they’re better off than younger people for perhaps the first time ever.
What’s behind this success story?
Part of it is pensioners themselves. Increasing numbers are choosing to work past retirement age, generating extra income and making the label ‘pensioner’ misleading. Part of it is short-term government policy and the impact of the triple lock which has seen State Pensions rise by more than both inflation and earnings growth over the past decade. The biggest part though is the decisions employers made 50 or 60 years ago, introducing generous final salary pension schemes to large parts of British industry. Pay-outs from those pension schemes are just about reaching their peak and many – by no means all – pensioners are reaping the benefits.
These circumstances won’t be repeated again. More and more people will, we think, continue to work well into retirement. But employers across the private sector have largely closed their final salary schemes and the triple lock, as John Cridland’s recent review of state pension age made clear, isn’t affordable beyond this Parliament unless we want to see State Pension age rise well above 70.
What are the prospects for future generations?
In 2008, the Pensions Act introduced automatic enrolment (AE) which meant that employers must put certain staff members into a pension scheme and make contributions to this scheme. Naturally, there were caveats as – for example – a person needs to earn £10,000 per year before being automatically enrolled into a scheme and the self-employed are currently exempt. There is also the option for a person to opt out as the idea behind the scheme was to improve a person’s retirement finances but not by drastically reducing their current standard of living.
With around 7 million people enrolled into a workplace pension, low-opt out rates and high levels of compliance amongst SMEs, it is generally agreed that AE has been successful. The government has launched their Automatic Enrolment Review 2017 to review progress and determine the strategy going forward. One area that it is expected to tackle is contribution levels. Currently, the employer contributes 1% of the employee’s salary and the employee contributes a further 1%. This is due to rise to 2% (employee 3%) in April 2018 and then 3% (employee 5%) in April 2019. However, while these increases are welcome, research suggests they may need to be higher.
Our research suggests that 13.6 million workers are at risk of falling short of an adequate retirement income. Put simply, having too little saved to maintain their lifestyle into retirement. Analysis suggests that in order to meet this target, people need to contribute 12% of their salary which may be difficult for lower income earners.
Another challenge the pension system is facing is the varying expectations, advantages and approaches that the different generations have. The baby boomers (those born between 1946 and 1964) have often benefited from defined benefit pensions and significant house price growth while Generation X (those born between 1961 and 1981) has found it harder to get onto the property ladder, see increases to the State Pension age and missed out on the roll-out of AE. The millennials who may well have been enrolled into an AE scheme at the start of their career are also facing the spectre of tuition fees and the impact of the house price growth that the baby boomers are enjoying.
This is not a simple conundrum to manage but arguably the most important step is to encourage each generation to make proactive retirement provision. One issue that could undermine this essential engagement is if larger pension schemes fail or if we see similar headlines to the BHS debacle.
The UK has a long history of providing employees with a workplace pension, in fact there are 27.3 million people in the UK who are benefiting, or will benefit from a DB scheme1. However, a combination of social, political and economic issues mean that members of schemes with the weakest employers* have just a 50:50 chance of seeing their benefits paid in full.
To tackle this issue, the PLSA launched a Defined Benefit Taskforce in March 2016. The aim was to get to the heart of the issues facing the DB system by seeking views and evidence from schemes of all sizes, as well as sponsors, regulators, government and intermediaries.
The first report – published in October 2016 – identified the scope of the problem while the second report – published in March 2017 – suggested potential solutions. Consolidation whether it be via shared services, asset pooling, a single governance structure or the creation of a superfund was mooted. The PLSA intends to publish a third report in the summer which looks at how this might work in practice.
Arguably, it is impossible to outline all the challenges facing UK pensions in just 1,000 words but fundamentally, the most important point to take from this article is that action is needed by individuals, government and employers to ensure that it can provide people with the retirement they not only want but expect.
* = schemes which hold 42% of liabilities of schemes in deficit
1 Occupational Pension Scheme Survey, ONS September 2016. Covers private and all public sector schemes (funded and unfunded).
Director External Affairs
Pensions and Lifetime Savings Association