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Alarm raised over retirement savings shortfall

Open-access content Wednesday 28th April 2021
Alarm raised over retirement savings shortfall

Many more members of defined contribution (DC) pension schemes in the UK are heading to retirement with inadequate savings than previously thought due to outdated modelling, new analysis suggests.

The research by PTL highlights how DC adequacy models are failing to consider major factors that influence savings, such as the decline in home ownership, and more people renting in later life.

Another factor ignored by models is that families in the middle of the wealth distribution scale are set to inherit less because their parents are having to pay for long-term care.

Furthermore, pension savings are likely to become the “de facto funder” of long-term health costs in the UK because successive governments have continued to duck the issue, according to the researchers.

“DC adequacy models make assumptions about all sorts of things, including certain lifestyle and social factors, the problem is that many of those assumptions are out of date,” said Richard Butcher, managing director of PTL.

“Unless we fix the models, we’ll have many more unhappy members and, far more importantly, more members living below the standards of living to which they aspire. Perhaps even in poverty.

“Beyond the human tragedy, this could cause significant damage to the brand of pension saving which has already suffered reputational issues over the years.”

The latest analysis also suggests that the “myth” of the graduate premium, in the case of some degrees, imposes a significant break on the ability of those affected to save for their retirement.

Financial fragility, although not a new problem, additionally means that pension scheme members are likely to opt out of saving in response to what many of us would consider a relatively minor financial event.

Butcher said that the impact of Brexit and COVID-19 on some employers has made it impossible for blanket increases in contributions, and that the government will need to focus what few resources it has left on growth generation.

“On the positive side, the pension system is becoming progressively more efficient, which means incremental gains can offset the impact of these factors,” he continued.

“Auto enrolment also helps, although the contribution rate remains too low for it, alone, to fix the problems. What would make a material difference is an increase in contributions. We need to aim for around 12% of all earnings.”

 

Image credit: iStock

Author: Chris Seekings

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