New research from JLT Employee Benefits (JLT), the UK’s fourth largest employee benefit consultant, confirms that the UK population typically underestimate its lifespan, is generally resistant to taking financial advice and expects the State to provide a safety net should retirement savings prove insufficient.
JLT commissioned a survey of 2,000 UK adults1 and 250 leading companies2 to assess the impact of the UK Pension Reform on savings trends in light of the sweeping changes made by the Chancellor at the last Budget. The report also includes a wider investigation around pensions systems in international jurisdictions, with a particular focus on the Australian pension model.
Over half of respondents were worried about financial security in retirement. Our findings have also revealed a substantial risk of people running out of money in retirement, with over 55% of respondents underestimating their longevity and nearly 40% of respondents saying they would, if they took a lump sum on retirement, reinvest it in either a long-term or easy access bank account, which currently yield negative real interest rates.
16% questioned didn’t know what an annuity was, which shows that there are still many challenges in terms of financial education and the Government’s ‘guidance guarantee’. This is further compounded by the fact that 60% of people are indifferent to - or actively resist - financial advice, which could impact income at retirement. With 72% of respondents planning to fall back on the State if their savings are inadequate and approximately 400,000 retiring from DC schemes each year, this will quickly become a drain on the UK Government.
Encouragingly, most employers (79%) support the Government’s ‘freedom and choice’ reforms. A quarter of employers would amend their pension scheme’s rules to allow flexible retirement and a quarter would not. The rest either already offer flexible retirement or respondents answered ‘don’t know’, which suggests that employers are still deliberating over their responses to these changes.
The majority of employers (69%) believe that, to ensure impartiality is not compromised, providers should outsource the delivery of guidance. Perhaps surprisingly, nearly two-thirds of employers (63%) think that the cost of additional support and advice should be borne by employers, although 35% said so under the condition that the cost is subject to tax relief. Only 19% of employers thought that individuals should pay for this additional support and advice.
Mark Wood, Chief Executive, JLT Employee Benefits, comments on these findings: “There is clear evidence that individuals need more support and guidance around their retirement planning and education has to play a key part in helping the industry tackle this challenging issue. Whether this is provided via the State, the pension provider, the employer or all three, remains to be decided. Our research shows there is an inherent reluctance to consult an adviser, which we believe is due to a fragmented British pensions market and the perception that paying for financial advice is only worthwhile if you are a high-net-worth individual.”
To provide a greater understanding of the implications of emulating other pension systems, JLT undertook a research trip to Australia, interviewing employers, banks, pension providers and media commentators about the Australian pension system cited by the Chancellor as a successful model. JLT’s findings are as follows:
• The Australian model was flawed – 80% of Australian pensioners rely to some extent on the State to provide retirement income, making the financial burden for the State unsustainable in the long term.
• Income from annuities in Australia used to be exempt from tax, but the relief was removed gradually since 2004, resulting in the disappearance of a once buoyant market with the consequences highlighted above. This shows that an appropriate tax system will be an important factor in maintaining the UK annuity market at a critical size below which it will not be capable to deliver value i.e. products that are fit for purpose and priced competitively.
• Longevity risks are overlooked by pension advisers in Australia, so pensioners aren’t advised to protect against them through annuity products. The underuse of annuities has led to a reduced size of the local annuity market, a lack of competition, and a lack of variety and innovation in the offerings. Therefore, we should raise awareness of longevity risks in the UK and how they can be mitigated by considering annuities as part of the retirement mix - not just fixed term and lifetime annuities, which are the only focus for Australians, but explore the full range of options, such as temporary, deferred, or with variable rates that the UK market offers in order to better match individual pensioners’ circumstances.
• The fact that the State pension is means-tested against assets and income drawn, combined with the absence of tax on drawdown after age 60, has unintentionally created an incentive for pensioners with smaller funds (c. £100k or less) to spend their entire savings very quickly as they would thereafter qualify fully for the State pension. Because the value of the State pension in the UK is to be based on a flat rate of £144 per week in today’s money, there will be no such incentive for individuals to draw down any quicker on their own pension funds. However, introducing means-tested pensions could still lead to a ballooning pension bill similar to that now faced by the Australian Government.
Richard Williams, Director, JLT Employee Benefits, commenting on the international review: “We can learn a number of lessons from other jurisdictions such as Australia, Switzerland and Chile but they still all have their own differentiating factors that make them unique and not comparable to the UK market. These factors include the State pension, taxation and investment alternatives. It is likely then, that the UK public and employers will react differently to that of international jurisdictions and the Chancellor will need to use this consultation period wisely to address these differentiators and come to a solution that is UK-centric.”
Key recommendations
In light of all the above findings and our support for freedom, flexibility and fairness in pension, JLT believes that providing the option for individuals to take their benefits as a lump sum should lead to a positive outcome. In addition, our key pension policy recommendations are as follows:
• Given the apparent willingness on the part of UK plc to co-fund guidance for employees, JLT believes guidance would be best structured by utilising the efficiencies of technology and providing educational material from age 55 via an agreed contract with the employer. Providing bite-sized educational pieces and modeling tools will allow individuals to make an informed choice when they are asked to assess the options they face at retirement. This coupled with the availability of full advice, if required, will provide the individuals with the best possible outcome with regards their retirement.
• Innovation is linked to freedom, therefore the Government should allow as much flexibility as possible for both the current rules for annuities and the prospective regime for the new generation of retirement income products.
• No one should have to take their benefits from a minimum pension age (currently, age 55), but proposals to increase the minimum age for accessing pensions wealth go against the grain of the policy of ‘freedom and choice’.
• There should be a requirement to review individuals’ retirement strategies at periodic intervals (say three to five years), similar to the requirement for drawdown reviews, to ensure that guidance is available at key decision points during retirement. Reviews could also be triggered by ‘lifestyle changes’ and pensioners should receive a regular letter (possibly annually) to remind them of the importance of reviewing their retirement needs.
• The Government should continue to allow private sector defined benefit to defined contribution transfers subject to continuing to work on combatting pensions liberation. There should be no further restrictions to the current rules on transfers from defined benefit to defined contribution pension schemes.
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