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.
At a glance
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:
- It’s unlikely future retirees will benefit from the security or value of defined benefits (DB) pensions, instead relying more heavily on the state pension and DC savings to meet their retirement needs.
- The proportion of homeowners is also likely to be lower, with more individuals renting into their retirement than before.
- People are living longer and with that comes the need for retirement savings to last longer, the potential for elder care costs and the reality that cognitive decline can impact the ability to make financial decisions into retirement.
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:
- Save more - Increase contribution levels and make sure more savers benefit from these higher levels.
- Maximise returns - Rethink investment strategies and prioritise growth opportunities.
- Make better retirement choices - Facilitate retirement solutions and decision-making to avoid unnecessary risk from using suboptimal approaches to providing income.
Automatic enrolment is currently not enough
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.
