Improving pension adequacy

We are all well versed on the reality that many of us are not saving enough for later life. It’s an issue that takes us far and wide across a pretty complex landscape. 

As the decline in defined benefit provision becomes more pronounced, and as we gather more insights about savers’ likely retirement outcomes, the extent of the challenge is becoming ever more apparent. 

As the 2023 Scottish Widows Retirement Report (PDF, 7MB) shows, around one in three (35%) people in the UK could be facing retirement poverty, unable to cover even life’s basics. 

When we look at how different societal and under-represented groups are faring, the lack of pension adequacy becomes even more pronounced.    

Women, for example, are still facing a significant pension gender gap with £7,000 less retirement income a year on average than men. (Source: 2023 Women and Retirement Report (PDF, 7MB) The lack of affordable, available childcare squeezes household incomes and often results in mothers, in particular, choosing to work part time or give up work altogether.

In addition, findings from our 2023 Master Trust Member Survey Insight Report (PDF, 8MB) underscore the financial pressures faced by those who told us that they’re disabled, with almost one in three (31%) saying their disability affects how they manage their finances. More than half (51%) of disabled people aren’t saving enough for an adequate retirement – unsurprising, as daily life is expensive for them which makes it even harder to save.  

The changing nature of employment also contributes; the rise of the gig economy, zero-hours contracts and job mobility meaning that increasing numbers will not have access to pension schemes or have short and patchy pension contribution periods. 

Auto-enrolment (AE) has been heralded as a success in terms of how it has positively influenced the number of people who are participating in workplace pension schemes. The next important step is increasing contribution rates as current levels are unlikely to secure an adequate income in retirement; estimates of the contribution rates needed vary from 12% to 20%. We suggest 15% is about right.

Collaboration is key

Addressing the adequacy challenge is incredibly complex and will require a significant collaborative effort. I came away from the last PLSA conference in Manchester with a sense of there being a real appetite for collaboration, with the industry working together alongside regulators, employers, charities and policy makers. 

Recognition of the challenges and the desire for collaboration needs to quickly shift to action and the 'PLSA’s Better Pensions Charter: Building a consensus for better pensions', of which we are a signatory, shows that shared ambition for improving retirement outcomes and belief that we can help to make it happen. 

Trustees, pension providers and employers are in a unique position when it comes to the opportunity to support and educate but I think it’s fair to say that we can all do better. Similarly, there is opportunity for simplification of the regulatory environment that we operate within, without diluting the benefits and protections that these frameworks bring for members.  

We also know that embedding a positive savings culture at an early age is an important early intervention and will help influence financial outcomes. 

My youngest boy once asked why he wasn’t taught “how to pay for life” at school, and it’s certainly a key point and something that’s even obvious to a much younger generation. Bringing financial education into classrooms is critical to improving financial resilience and life skills from a young age. 

Taking a fresh approach to engagement – using AI and gamification – much like our AI-based Pension Mirror which teaches people about their money and pensions, is also vital, especially for younger audiences. With a quarter of a million uses so far and a successful social media presence, it’s an example of how doing things differently (and simply) can have a positive outcome. 

And as we head into an election year, cross-party pension policy consensus has never been so important. Whoever the next Government is, there are significant benefits in ensuring a stable and long-term pension policy agenda, which has cross-party agreement. 

The imminent auto-enrolment reforms (AE 2.0) will help to bring younger and lower-earners into workplace pensions. It’s one of a number of initiatives to improve retirement outcomes and a step forward which brings more people into the system from a younger age, improving pension saving for groups like women, for whom pension adequacy is an ongoing problem. 

I’m certainly holding the feeling of optimism and collaboration that permeated the PLSA meeting close to me, into 2024 and beyond.