The paper, titled ‘What can the UK do to ensure future retirement adequacy?’, highlights that many employers offer generous matching DC contributions, but enrol employees at minimum levels by default. Employees can voluntarily choose to increase their contributions, and receive higher corresponding contributions from their employer, but due to lack of awareness and inertia, many do not.
These missed contributions are leading to lower retirement savings across the board and the real risk of widespread pensions inadequacy for many employees.
According to the Pensions and Lifetime Savings Association (PLSA), over 50% of the population will fail to meet the retirement income objective set by the 2005 Pensions Commission.
While pension contributions are a significant factor in DC outcomes, there are other important steps that can be taken to improve outcomes too. The paper emphasises the need for immediate action to address this issue and proposes three key elements to ensure future retirement adequacy:
1. Save More: The white paper recommends increasing pension contributions to ensure individuals have enough savings for retirement. It suggests implementing a higher default contribution rate under automatic enrolment, with the option to opt down if affordability is an issue. This would help individuals achieve higher levels of contribution and build a buffer for unexpected events.
2. Maximise Returns: The paper highlights the importance of taking enough investment risk at the right time to generate long-term growth. It suggests investing predominantly in growth-seeking assets, such as equities and private market investments, during the early years of saving and to retain exposure to these assets for longer. This approach can significantly impact retirement outcomes, particularly now that traditional ‘cliff-edge’ retirement is less likely for many, and can help individuals achieve a more comfortable standard of living in retirement.
3. Make Better Retirement Choices: The white paper emphasises the need for individuals to make informed decisions at the point of accessing their pension benefits. It calls for the implementation of the Government’s proposed Mansion House Reforms, which require pension schemes to offer suitable decumulation solutions consistent with pension freedoms. The paper also supports the use of Collective Defined Contribution (CDC) decumulation models to provide additional income options for retirees.
Helen Gilchrist, Head of DC Consulting at WTW, stated, "The retirement adequacy issue in the UK requires immediate attention. WTW is considering some bold initiatives to address the issue in a wider context but, in the meantime, there are practical steps that can be taken to ensure DC savers have a secure and comfortable future in retirement.
“By saving more, maximising returns, and making better retirement choices – together with continued efforts to improve financial literacy and education throughout the UK – retirement outcomes can be significantly improved for millions of people.
“Enrolling employees into DC schemes at a higher default level is one very practical way of addressing long-term adequacy issues. Individuals should be free to proactively lower their contribution levels if needed whilst remaining compliant with auto-enrolment rules. But we know that even those that can afford to contribute more, and know they should, often need encouragement in order to do so. Most people assume that the default contribution level at which they are enrolled will be adequate for their needs, which we know is currently not likely to be the case.”
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