23 February 2015
This report, supported by Prudential, calls upon the next Government to introduce a new independent Pensions Commission to rebuild consensus-based policy making in pensions and tackle the substantial challenge of insufficient incomes in retirement.
The report, “Consensus Revisited” reveals that, despite a number of positive policy initiatives, many future savers are still unlikely to secure adequate retirement incomes as a consequence of economic and demographic headwinds:
The economic storm:
- The UK’s economic recovery is founded on rising household spending, but in the absence of rising incomes, savings will fall and indebtedness will rise.
- Household debt to income is predicted to rise above its pre-financial crisis peak in 2018, while the savings ratio is predicted to fall to its lowest level since 1997 .
- The country may also be entering a “new normal” period of low investment returns, with average annual returns on bonds and equities expected to be at least 50% smaller than they were in the 30 years prior to the financial crisis .
The demographic storm:
- On average, in 2012, women left the workforce at 63, which means they will need to fund 26 years in retirement. Men will need to fund 21 years .
- The average length of time spent in retirement has significantly increased over the last 30 years, by more than one third for men and just under one fifth for women .
- Even with the Government’s planned changes to State Pension age, people will still require sufficient savings to fund up to a third of their adult lives in retirement (over 20 years).
In future, hopes for an adequate retirement income will hinge on people saving enough into defined contribution (DC) schemes, but evidence suggests this is not yet the case:
- On average, employees contribute just 2.9% of their salary to a DC pot by comparison to 5.9% for members of defined benefit (DB) schemes .
- The difference in the employer contribution is even starker – just over 6% for DC schemes but over 15% for DB schemes .
- Projections suggest that unless contributions into DC schemes rise, less than half of median earners will be able secure an adequate retirement income through Auto-Enrolment.
Given the context of policy change coupled with severe economic and demographic headwinds, the report argues for a new Pensions Commission to take a “holistic, non-partisan view of pensions policy” and make “well-informed decisions on the basis of strong evidence and widespread consensus”.