The UK pension system is out of date, not fit for purpose and could leave many savers exposed to poverty later in life, pension expert Ros Altmann has warned
In a report Pensions - time for change, sponsored by MetLife, Altmann concluded that defined contribution schemes were not fit for 21st century lives. She said that the time had come to change out-of-date pensions, especially as retirement prospects in the UK are more uncertain than ever and state pensions are being cut.
'New thinking on both pensions and retirement is urgently required and those who want the best chance of better incomes will need to plan carefully for the future,' she said.
The report highlights fears that the government's auto-enrolment scheme brings a 'significant risk' of inadequate pensions as DC schemes provide no guarantees and leave savers at the mercy of market performance.
According to Altmann's report, 60% of pension savers say they do not understand or do not know whether they understand the risks they face in DC pensions. That rises to 75% among 18- to 24-year-olds, who are a key target for auto-enrolment.
The report also included a survey of financial advisers, which found they believe just 33% of clients would achieve their target retirement income. When it comes to their own retirement planning, fewer than one in ten financial advisers said they would actually buy a standard annuity.
Altmann said: 'As retirement becomes a process rather than an event the need for different options for both investment and income streams is growing. Planning flexibly is ever more important and it will also be necessary to find approaches which offer better later-life income prospects than can be provided by standard annuities.'
She highlighted the risks of relying on annuities, which do not increase with inflation. These products would potentially expose millions of pension savers to poor value and later-life poverty, Altmann warned.
The report also compared options for retirement income and explained why considering guaranteeing pensions could be an important part of the retirement income decision.
'People automatically consider insuring their house against risks they hope they will never face but when it comes to their other big asset, their pension fund, most people do not even consider insurance against a fall in the value of their fund, or falling later-life income,' she stated.
At MetLife, managing director Dominic Grinstead said that the need for innovation in retirement planning was vital and advice essential.
He added: 'Dr Altmann's report is an important contribution to the debate on the future of UK pension provision and MetLife is committed to playing its part.'
Responding to the report, Geraldine Kaye, managing director at GAAPS Actuarial, agreed that DC pensions were not fit for modern-day savers.
'Pensions and long term care provision have to sit more closely together,' she said.
'Successive governments still get it wrong as they should look to identify more effective ideas of how the two can be balanced better.
'Three questions to consider are what really defines an adequate pension, how is one's health viewed as you get older, and what is the true function of a pension fund?'
