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Current policy not enough to secure adequate retirement incomes for many.
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Retirement planning difficult due to constant policy changes.
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Uncertainty is compounded by twin threat of falling real incomes and low investment returns.
The report, “Consensus Revisited” reveals that, despite a number of positive policy initiatives, many future savers are still unlikely to secure adequate retirement incomes as a consequence of economic and demographic headwinds:
The economic storm:
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The UK’s economic recovery is founded on rising household spending, but in the absence of rising incomes, savings will fall and indebtedness will rise.
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Household debt to income is predicted to rise above its pre-financial crisis peak in 2018, while the savings ratio is predicted to fall to its lowest level since 1997[i].
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The country may also be entering a “new normal” period of low investment returns, with average annual returns on bonds and equities expected to be at least 50% smaller than they were in the 30 years prior to the financial crisis[ii].
The demographic storm:
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On average, in 2012, women left the workforce at 63, which means they will need to fund 26 years in retirement. Men will need to fund 21 years[iii].
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The average length of time spent in retirement has significantly increased over the last 30 years, by more than one third for men and just under one fifth for women[iv].
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Even with the Government’s planned changes to State Pension age, people will still require sufficient savings to fund up to a third of their adult lives in retirement (over 20 years).
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In future, hopes for an adequate retirement income will hinge on people saving enough into defined contribution (DC) schemes, but evidence suggests this is not yet the case:
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On average, employees contribute just 2.9% of their salary to a DC pot by comparison to 5.9% for members of defined benefit (DB) schemes[v].
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The difference in the employer contribution is even starker – just over 6% for DC schemes but over 15% for DB schemes[vi].
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Projections suggest that unless contributions into DC schemes rise, less than half of median earners will be able secure an adequate retirement income through Auto-Enrolment.
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Given the context of policy change coupled with severe economic and demographic headwinds, the report argues for a new Pensions Commission to take a “holistic, non-partisan view of pensions policy” and make “well-informed decisions on the basis of strong evidence and widespread consensus”.
ILC-UK argue that the central aim of such a Commission should be to help savers secure income adequacy in retirement. The think tank argues that the commission should be given a remit to:
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define target outcomes for retirement savings and extending working lives.
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monitor progress against these targets.
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consult and ultimately decide on whether new policy reforms are needed.
The report argues that a commission be set up as soon as possible after the general election to help navigate the tricky road ahead, but that “in order to allow the current set of reforms to bed-in and to ensure at least short to medium term stability in pensions policy, the Commission should not set out any final proposals until 2017 at the earliest”.
The report also argues that the Commission must “carry sufficient weight politically to ensure that its findings and proposals are taken seriously” and recommends that the commission should report to the Secretary of State for Work and Pensions the
Chancellor of the Exchequer and the Prime Minister.
Launching the report, Ben Franklin, Senior Research Fellow at ILC-UK said:
“A new Pensions Commission is urgently needed in order to look at the problem of retirement income adequacy in a holistic way – taking into account the political and economic realities of our time. The core goal of ensuring adequate retirement incomes based on the principle of consensus based policy making, is consistent with the original thrust of the Turner Commission a decade ago, and can be at the heart of a new coherent settlement on pensions policy in the UK."
Tim Fassam, Head of Public Affairs at Prudential added:
“Recent changes have expanded the number of people saving and provided a wider range of choices in retirement. While these are important improvements, most people are still not saving enough to provide the retirement they desire. Pension decisions are long-term, so stability and predictability are important in encouraging people to save more. At Prudential we believe the best way to achieve this is through consensus with savers, policymakers and industry working together.”
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