Private sector defined benefit schemes are closing more rapidly than realised, meaning the incomes of newly retired workers are set to fall at a much more dramatic rate in the coming decades than had previously been thought, according to consultancy LCP.
A report from the firm found in the private sector the decline of traditional final salary-type pensions is more rapid than previously assumed, while the rise of new ‘pot-of-money’ workplace pensions will take longer to make a real impact than previously expected.
Together, these two factors have combined to create a downward slope in at-retirement incomes that LCP has dubbed “the ski slope of doom”.
Until now, the working assumption of policymakers has been that the historic legacy of final salary pensions will largely tide people over until new workplace pensions — bolstered by automatic enrolment — take their place.
The consultancy’s analysis, based on new modelling from a range of data sources, argues that this assumption is wrong for three reasons.
The first is that past modelling has “lumped together” around 6m public servants, who are still building up good salary-related pensions, with tens of millions of private sector workers, the large majority of whom are not building up any salary-related pensions.
Second, past figures showing how pensioners as a group are faring relative to workers have been an average over all pensioners, and have not focused just on those retiring today, which disguises the fact that in future the newly retired will be getting steadily worse off.
Finally, although auto-enrolment has brought around 10m extra workers into pension saving, mostly into new pot-of-money pensions, these pots will take a very long time to be reflected in meaningful at-retirement incomes.
The mandatory 8 per cent contribution was only finally introduced in 2019, and it will be decades before the majority of newly retired pensioners will have a meaningful pension based on that contribution rate.
LCP partner Sir Steve Webb, the report’s author, said: “We have been living in a fool’s paradise when it comes to incomes at retirement. For years, salary-related pensions from private sector jobs have supported the incomes of the newly retired, and men in particular. But these pensions are disappearing much more rapidly than we thought.”
He added: “New-style workplace pensions are not being built up quickly enough to take up the slack. We need a step change in the urgency of pension reform.
“Unless urgent action is taken to increase the pace at which new pensions are being built up, a whole generation of people will retire on lower incomes than previous generations, or will have to work longer before they can afford to retire.”
The situation may well be exacerbated by Covid-19, with the pensions industry already expecting the pandemic to spark a wave of scheme closures.
Research by consultancy Aon released in December reported that scheme closures to future accruals were up nearly 10 per cent in the first quarter of 2020 versus the same period in 2019.