Making retirement saving compulsory would help solve the UK’s pensions crisis, Larry Fink, Chief Executive of BlackRock, has told industry leaders.
Britons are being challenged by rising pensions costs, insufficient savings and insufficient pension fund investment returns. Addressing the National Association of Pension Funds (NAPF) Investments Conference in Edinburgh today, Mr. Fink outlined the scale of these challenges and urged the industry and policy makers to do more to ensure people are prepared financially for retirement.
Fink said: “As I have advocated in the U.S., I would recommend simply making an appropriate level of retirement savings mandatory here in the UK, without the opportunity to opt-out. This has been done with the superannuation system in Australia and has proven to be extremely effective. There is too much risk that people will either opt out, or not put enough away even if they remain in a plan.”
Pensions costs doubled; insufficient savings
Mr. Fink presented new BlackRock analysis of the UK annuities market suggesting the cost of retirement income has doubled over the last 40 years. In 1971, each pound of retirement income cost about six pounds of savings for a 70 year old male. Today, that figure has ballooned to nearly 12 pounds, with half the increase due to lower interest rates and half resulting from increased life expectancy.
At the same time, one in two UK adults have yet to start saving for retirement, according to BlackRock’s Investor Pulse Survey. Research by the Policy Exchange also shows the average UK worker has a pension pot of just £36,800 pounds, which will likely yield an income of only £1,340 a year in retirement, highlighting the need for education around pensions and the effects of longevity.
“The shift from defined benefit to defined contribution retirement savings has presented a huge challenge to individual savers here as elsewhere in the world. We need people to save more, and save earlier,” said Fink.
Pensions progress
Despite calling for more action, Fink praised the industry for its work, and the UK government for raising national retirement ages. Office of National Statistics (ONS) data shows average life expectancy in the UK has soared to 80 years old – eight years higher than in the 1970s – meaning retirement income will need to stretch further than ever.
“It took real courage to raise the retirement age to 68 and then to 69, one of the highest eligibility thresholds in the world. And the NEST plan and auto-enrolment initiatives are having a marked effect on the retirement landscape in the UK,” Fink added.
Pension schemes’ investments dilemma
Despite these changes to the UK’s pensions framework, around 4100 pension plans remain in deficit relative to their liabilities, with a £140 billion total shortfall, as outlined by The Pensions Protection Fund.
Schemes remain heavily invested in traditional assets such as equities and bonds which are potentially exposed to major risks, BlackRock believes. Fink stressed the importance of thinking beyond traditional investment approaches for the industry to live up to its “pensions promises”, and also for the industry to work more closely together for the benefit of savers.
Fink said: “The reality is too many pension funds have not been achieving the returns they need to meet their liabilities. Pensions managers will need to take a bold approach in order to meet liabilities – a greater willingness to explore alternatives, including hedge funds, and to explore more flexible, non-traditional bond funds. Pension schemes, consultants, asset managers and policy makers have the opportunity to work together to solve these challenges.”
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