The Pension Industry needs to stimulate savers to get back to pre-crash retirement income levels

08 September 2017

Amid much hand-wringing over recent weeks about UK consumers’ apparent inability to set money aside for a rainy day, let alone retirement; crystallised by the Office of National Statistics’ 30th June report showing a 75% collapse in UK Household Savings Ratio from 6.7% in Q1 2014 to 1.7% in Q1 2017; I was intrigued to read Royal London’s assessment and reinterpretation of ONS’ numbers which countered the view that UK consumers have stopped saving.

Royal London looked ‘under the bonnet’ to analyse that there are a few key factors influencing the apparent reduction in the ONS Savings Ratio which have nothing to do with reckless credit card-fuelled consumer expenditure and everything to do with inaccurately reported pension savings. In an excellent paper, Royal London reveals that the ONS savings ratio is a mish-mash of statistics. The provider indicates that it is dangerous to simply add these stats together to create the ratio. Some of the major factors affecting the ONS savings ratio are:

  1. A fall in the rate at which companies are seeking to tackle historic DB pension deficits. This doesn’t mean future pensioners will be any poorer – it’s just that employers are putting off footing the bill.
  2. Lower employer pension contributions as DB schemes are closed to future accrual and replaced with less generous DC schemes. This does mean future pensioners will be poorer, yet the Savings Ratio treats this reduction in exactly the same way the one above!
  3. A decline in rate of return on savings achieved by DC pensions funds (going back to my last article on over-cautious investment for employer schemes)
  4. A rise in the number of older savers decumulating - getting their money out of pensions and paying higher taxes as they do - almost certainly fuelled by 2015’s Pension Freedoms legislative change which made it possible to cash out at 55-years old for the first time.

Flaws in the ONS savings ratio are further exposed by the unfunded public sector pension schemes. The value of the pensions these provide has become even more generous as longevity increases and real discount rates fall. That’s good news for those who will receive these pensions, but is completely ignored by the ONS savings ratio.

Looking a little deeper at pensions entitlements and retirement income, Fidelity produced some numbers in recent weeks that show DC-based retirement income nearly halving in the last 10 years based on modelling someone retiring in 2007, compared to 2017. The decline is put down to declining real wages relative to inflation which mean that the 2017 retiree will have put less into his/her pension (based on combined contributions of 12% of salary) on the run-up to retirement; together with exposure to a less buoyant stock market; and, most importantly, falling annuity values.

All these negative factors meant that post-crash retirees came out with 46% of the buying power when securing guarantee income in retirement in 2017, according to Fidelity. However, for those not buying an annuity but going down the income drawdown route, the picture could be a good deal more encouraging, although somewhat less certain.

It is easy to be blind-sided by the post-crash, post-annuity value decline blues, but there are still some positives to consider. For example, more than eight million people working in over 600,000 companies are now saving into an auto-enrolment pension scheme who were not before AE kicked off. These people will be in receipt of a combined contribution equivalent to 8% of their band earnings from April 2019. Whilst it’s disappointing that the vast majority of new schemes pay only the statutory minimum band of earnings between £5,876pa and £45,000, at least that’s better than nothing, which was the position before AE.

There is even talk of creating an AE pension solution for the AE pension-disenfranchised 15% of the working population that are self-employed – some 4.5m people altogether. What about the Government picking up the tab for the 3% employer contribution that other workers will enjoy from 2019 to incentivise the growing army of self-employed to save more for retirement? A number of commentators have suggested this already.

There is a clear need for both employers and employees to pay more into their pensions to increase retirement savings levels and begin counteracting some of the negative impacts that declining DB pension penetration and post-crash economics have wrought on retirement income prospects.

How best can we stimulate more saving for retirement? Our research into UK Baby Boomers aged 54-71 years, which we will unveil in the next few weeks, indicates that people are already prepared to work a little longer to improve their retirement income prospects. All they need to be encouraged to do then, is to save a little more each month to prevent their desired retirement age target slipping uncomfortably far down the road.

Technology can help here. What about a retirement income health calculation tool attached to your pension policy which shows you at the touch of a button on your mobile what your retirement income looks like if you are prepared to go into drawdown rather than buy an annuity at age 66 or if you delay taking any retirement income for a further two years?

What if that same tool warns you if one of your key assets in your pension has gone up or down in the last quarter, offering guidance on how best to ring-fence profits or recover losses, with a view to optimising asset performance? One finding from our survey indicates 45% of Baby Boomers wanted to be alerted instantly on their mobile if a pension asset they hold has gone up or down by 10% or more in a given quarter. But which provider offers this sort of functionality today and will the Pensions Dashboard offer it in two years’ time when it goes live?

With the Government bogged down in Brexit negotiations there is no point in waiting for legislation. Instead the field is wide open for innovative pension providers to create these tools and portals which could enable savers to keep abreast of saving levels. Providers that can successfully engage their customers will reap the reward with higher contributions, as will their members who by saving more may yet find that their own retirement can match the previous generation who are already enjoying relatively healthy retirement incomes.

Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas

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