What the ONS stats tell us about workplace pensions

As the World Trade Organisation warns of a 'lost decade' of economic growth globally, thanks to the effects of severe lockdown everywhere, the Office for National Statistics also paints a bleak picture for British pension schemes. 

The sudden shock falls in February to March 2020 as stock markets nosedived on news that the virus had become a pandemic – as well as worries over the Russia/Saudi Arabia oil price standoff – caused immediate concern for pension scheme values. 

This was well-documented at the time and has been quantified by the ONS in its latest figures. The body has revealed that gross assets of defined contribution pension schemes (excluding derivatives) fell by 12 per cent in the first quarter of 2020. 

Although they recovered to their end-2019 levels by the end of June 2020, the drop in asset values came at the same time as employers across the UK announced they were having to reduce or suspend payments into their workplace pension schemes to protect their business revenues.

This means a double whammy for the 23m people in the UK who are members of a DC pension: not only did they suffer a three-month drop in pension values, but they have also missed out on a significant stock market recovery, as employer contributions were absent from the purchasing power of the employee's own contributions. 

Moreover, as the economic woes deepened for millions of people, individuals also halted or temporarily suspended their own pension contributions. 

According to the ONS, the combined employee and employer contributions to DC schemes fell by 11 per cent and 5 per cent respectively between the first and second quarter last year.

As a nation we are already chronically undersaving for our retirement. - Andrew Tully

In real terms, this means a fall to £1.56bn in Q2 2020 from £1.76bn in Q1. The full impact, however, is yet to be seen when the calendar year-end figures come out later in 2021.

Simultaneously, growth in membership of DC occupational schemes slowed between April and June 2020, suggesting people have delayed starting saving into a workplace pension, perhaps as a direct result of worries over their future finances.

The figures do not, thankfully, indicate that people who are already members have pulled out of their occupational schemes completely – which is a positive sign.

However, what the ONS indicates is worrying, according to pensions specialists. It indicates that not only are people having to 'borrow' from their tomorrows to pay for today's bills, but they risk being left in a more vulnerable position in their retirements, with a large dent being made in their retirement plans.

Tip of the iceberg

Moreover, this is just the tip of the iceberg – as the UK enters its third strict lockdown, more than 2.6m people are estimated to be unemployed, government support schemes are expected to unwind in 2021, and people in money purchase schemes are looking increasingly vulnerable. 

This is the view of Kate Smith, head of pensions at Aegon. She comments: "These figures represent just the start of a trend, as furlough has continued and job losses are increasing.

"The longer-term impact of this could seriously affect the financial wellbeing of some people by putting a massive dent in people’s retirement plans and ability to save for the future."

She explains that although withdrawals during the first half of 2020 have been "cautious" among those over 55 – according to the ONS – she worries this may have changed in the second half of last year, as the pandemic continued and the economic conditions worsened.

Ms Smith adds: "Pensions are designed to provide an income throughout retirement, and reducing the amount of income withdrawn during a period of investment market downturn could be important for the longevity of the pension pot.”

Aviva has also charted the course of DC pension investment with some concern. As the pension provider's graph (below) shows, there is a stark drop-off in contributions and a slowdown in membership, coinciding timewise with the first UK lockdown.

Alistair McQueen, head of savings and retirement at Aviva, says: "The impact of the pandemic on pensions has resulted in an alarming 11 per cent drop in total private sector occupational defined contributions by employees. This will mean a poorer retirement for many. The longer this drop persists, the greater retirement impact will be."

His comments have been echoed by Andrew Tully, technical director at Canada Life, who notes: "The ONS [publication] provides an interesting snapshot of the UK pension system over what has been a turbulent period.

"It certainly presents a number of areas for the industry and government to pay close attention to in the future.

"While it’s good to see that pension scheme membership has remained relatively positive, it’s worrying that employee and employer contributions to DC schemes have fallen.

"As a nation we are already chronically undersaving for our retirement, and as we move out of the coronavirus crisis it’s important we find ways to increase this pension saving back, at least, to previous levels.”

Fee fairness

There was some good news that came out at the same time as the ONS statistics, however, which may well help to alleviate concerns people in workplace schemes may be having. 

This was the outcome of the Department for Work and Pensions' review of the default fund charge cap and standardised cost disclosure. In this, the DWP advocated keeping the 0.75 per cent DC pension charge cap, which has been called an important consumer protection by pensions industry commentators.

Nigel Peaple, director of policy and advocacy for the Pensions and Lifetime Savings Association, says: "We are pleased to see the level and composition of the 0.75 per cent defined contribution pension charge cap retained following the DWP’s review.

"The cap is an important consumer protection, ensuring savers receive better value for money from their pensions, though in practice most DC schemes are already offering great value to their members by offering default funds that operate well below the cap."

As reported by FTAdviser: "The government first proposed the ban on flat fees in June 2020 in response to industry concern about the deleterious effects flat fees and admin costs have on small pots.

"Their depletion by charges and administrative fees has long been a serious problem for members, who can in some cases see their pensions eroded entirely over the course of their careers, at a cost to the individual of hundreds of pounds of savings."

As a nation we are already chronically undersaving for our retirement.-- Andrew Tully

The DWP also recommended setting a minimum balance of £100, below which flat administration fees cannot be applied. Mr Peaple says this will protect the pension savings of workers with the lowest pension balances, but warns a longer-term solution to the small pots issue must be developed.

According to Mr Peaple: "It is important the government continues to consult with the industry on this issue via the Small Pots Working Group as well as on future increases to flat fee balance minimums to deliver a successful automatic enrolment market that works for all savers. 

“We are also pleased to see DWP recognises the success of the Cost Transparency Initiative, the industry standard for investment cost data developed by the PLSA, the Investment Association and the Local Government Pension Scheme advisory board.

"There has been widespread take-up among asset owners and we encourage all pension schemes to adopt the standard.”

With costs looking to be under control and more transparency given to consumers, this might help consumers feel less worried about the future purchasing power of their pension pots. 

But as commentators have stated, the full damage of Covid-19 on pension savings is yet to be quantified, and those in DC schemes, who bear all the investment risk themselves, will need advice in the months and years ahead to ensure they move from a financially vulnerable situation to a financially stable position.

Simoney Kyriakou is senior editor of FTAdviser

Have your say: What do you make of the pension trends? Let us know at fa.letters@ft.com