Your IndustryApr 7 2016

Why is there still such a pensions gap?

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Why is there still such a pensions gap?

Despite A-Day putting pensions front-of-mind, there is a pensions gap between what people think they will need in retirement and what they are actually saving for retirement.

An indicator of this can be gleaned from the situation with the liabilities UK firms face over defined benefit/final salary workplace schemes.

Research from JLT Employee Benefits has revealed shortfalls in UK private sector DB pension schemes have doubled since 2006, despite employers making contributions worth £160bn.

JLT estimates DB scheme liabilities have risen from £1.1trn in 2006 to £2.1trn in 2015.

Further statistics from Aviva’s latest report suggest the average individual is under-saving for retirement. The average amount saved by those aged over 45 is £55,000.

If they expect to retire on an income of approximately £27,600 a year, on top of the full state pension, they would need to save nearly £200,000 into their private pension.

Part of the problem, according to the JLT research, is the ongoing improvement in life expectancy, which has put strain on pension scheme funding and individual saving. Add to this the investment uncertainty and changes to pension schemes over the years, and it seems people just are not confident enough to save more.

Jacquie Reid, associate director at Sackers, says: “When you talk about a ‘gap’, this could mean “why is it people aren’t saving enough for retirement?’

“Today’s pensioners have been able to rely on a form of DB pension with certainty of future income and a known retirement date.

We are in a world that prioritises consumption over saving and house purchase over retirement Mike Morrison

“However tomorrow’s pensioners are not so lucky. Most will be saving into defined contribution (DC) pension arrangements where the amount saved depends on contributions paid in and investment returns.

“Typically, employer contributions are not enough on their own to meet members’ income expectations at retirement. Pensions are complicated, full of jargon and retirement seems too far off for most people to be able to say how they would like to take their pension benefits and when.”

Mike Morrison, head of platform technical for AJBell, agrees: “Pensions are not understood by the majority of the public and so engagement is low.

“The new pension freedoms rules [brought into play in April 2015] and auto-enrolment are two initiatives that will have a positive effect here but it will take time.

“In addition, we are in a world that prioritises consumption over saving and house purchase over retirement.”

There is some comfort, however. Ian Naismith, pensions expert for Scottish Widows, comments: “The gap is decreasing. The most recent Scottish Widows Retirement Report revealed 56 per cent of us were saving adequately for retirement, up from 45 per cent two years ago.

“Evidently there is still a gap and it is largely to do with how much people believe they can afford to save for their retirement.”

So why didn’t A-Day get more people saving more? According to Peter Bradshaw, national account director for Selectapension, the biggest reason why A-Day did so little to bridge the pensions gap is because of a failure to meet the needs of the majority of people in Britain.

Because it focused on tax perks for higher earners and carried a lack of applicability across various groups, Mr Bradshaw says this meant the benefits of A-Day did not percolate through the ranks.

He explains: “The A-Day changes did not fully engage mid- and lower-earners, and the tax simplification alone it brought in did not therefore provide sufficient motivation for these groups.”

Richard Parkin, head of pensions for Fidelity International, argues A-Day did make pension simpler for “most people”, because it gave a single set of limits applying to all types of pension.

But he agreed A-Day “added to the complicated web of pension rules because it didn’t deal with the past effectively. This has been a perennial problem of pension policy”.

And because the rules are still complicated, Mr Parkin believes continuing changes to the pension landscape undermine people’s confidence in saving, adding: “The pensions gap in the UK comes from poor coverage and poor contribution levels.”