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LONDON — Workers in the U.K face a “risky” future when it comes to their pensions, according to a report released by think tank the Institute for Fiscal Studies.
The report published last week outlines “challenges” facing future generations and argues the entire system needs to be reviewed.
Almost 90% of Brits aren’t putting an appropriate amount of money into their pension pots — generally considered to be around 15% of earnings, according to the IFS report. People on lower incomes are particularly at risk as they don’t necessarily meet the requirements for automatic pension enrolment.
“Only 44% of those earning £5,000–£10,000 ($6,200–$12,500) per year participated in a pension in 2019,” the report says, compared to 87% of people with median earnings (between £25,000 and £30,000) and 92% of people who earn more than £50,000.
Most pension money is saved through defined contribution programs, where the final amount is dependent on how much money the owner contributed throughout their life and the success of their investments. The alternative is the less common defined benefit system, where a pensioner receives a retirement income based on their final salary and the number of years they worked for their employer.
We need a major review of pension provision now in order to give us a chance of avoiding a future that looks worse than the present.
Institute for Fiscal Studies
More and more people are retiring with defined contribution pensions, which offers more flexibility but also gives owners the responsibility of managing the finances, and the associated risks, themselves, the report says.
“While pension freedoms do give people the opportunity to take control of their own finances, even for the most numerate the decisions on how to draw on their pension wealth through their retirement are difficult,” the IFS says.
More people are also opting to work for themselves, but there has been “a collapse” in pension saving among self-employed people, the report said.
“We need a major review of pension provision now in order to give us a chance of avoiding a future that looks worse than the present,” the IFS report says.
High contribution rates
Increasing pension contribution rates for U.K. workers should be “top of the agenda” when it comes to reforming the pension system, according to Romi Savova, CEO of pension management platform PensionBee.
“Auto-Enrolment has proved to be an invaluable tool in increasing the number of people participating in pension saving, and by abolishing the lower earnings threshold (currently £10,000), its benefits could finally capture a greater number of lower-paid and part-time workers,” Savova told CNBC via email.
Including self-employed savers within that framework would also boost their pension pots and reduce their dependence on the state pension later in life, Savova added.
Most people in the U.K. are automatically entitled to a state pension, which is currently £203.85 ($253) per week. The amount is more generous than previous state pensions, but would still lead to a “big drop” in living standards for middle and high-income earners who hadn’t put money toward a private pension fund during their life, according to the IFS.
The state pension age is currently 66 years old, which on average means that a man’s pension has to cover another 19 years of his life, while a woman needs to have saved enough money to account for another 21 years once she leaves employment, according to life expectancy data from the Office for National Statistics.
The state pension age is set to increase to 68 between 2044 and 2046, according to the ONS, which, without reforms, will only create a more challenging retirement environment, according to Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association.
“Increasing the State Pension Age will only escalate pensioner poverty which falls disproportionately on those who have lower incomes and retire early due to ill-health,” Peaple told CNBC via email.
A ‘big issue’ to address
Even when people are putting enough money into their pensions, there is much debate as to how that money is being used and whether it is being invested in the right places to maximize returns.
For example, the recent shift in bond market behavior on the international financial markets means the composition of defined benefit pensions needs to change, according to Nicholas Lyons, lord mayor of the City of London, which is “a big issue” that needs to be addressed.
“Asset managers have been able to invest in fixed income instruments because we’ve been in a bond market rally for 20 years,” Lyons told CNBC, but the new inflationary environment coupled with higher interest rates means that needs to change, he said.
“We need to invest in the real economy, so this is a time where we shouldn’t look at what’s happened in the last 15 years and say that’s going to carry on forever. We need to see this as point of departure,” he added.
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