The UK pension saving system is “out of date” and not “fit for purpose” at a time when retirement prospects in the UK are more uncertain than ever and state pensions are being cut, leading independent pensions expert Dr Ros Altmann warns in a report today.
The Government plans to revitalise retirement saving through auto-enrolment, which is designed to offset the abolition of an earnings-related element to future state pensions and employer pensions. Auto-enrolment aims to recruit around 11 million new pension savers, but most will be contributing to pension schemes which do not guarantee future pension incomes, leaving workers at the mercy of markets and annuity rates. They are, therefore, facing a “significant risk” of inadequate pensions, the report warns.
Research for Dr Altmann’s report ‘Pensions – Time for change’, sponsored by MetLife, shows 60% of pension savers say they do not understand or do not know whether they understand the risks they face in defined contribution pensions. That rises to 75% among the 18 to 24-year old age group which is a key target for auto-enrolment. A study among financial advisers shows they believe just 33% of clients will achieve their target retirement income. When it comes to their own retirement planning, less than one in ten financial advisers would actually buy a standard annuity.
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Dr Altmann writes: ““Defined contribution pensions are not fit for 21st century lives. New thinking on both pensions and retirement is urgently required and those who want the best chance of better incomes will need to plan carefully for the future.”
The renowned consumer champion’s report says the current system is too inflexible as the pensions industry assumes savers buy an annuity at a pre-determined retirement date. That “one-size fits all approach does not fit any more” as many people will not, or should not, buy an annuity and will not retire at so-called ‘normal’ pension ages. Savers, pension providers and advisers need to look at a wider range of investment and retirement income solutions.
Standard ‘default options’ offered on auto-enrolment schemes may not be fit for purpose and so-called ‘lifestyle’ investment funds do not fit with modern lifestyles while ‘target date’ funds will often be targeting the wrong date as more people work longer.
Dr Altmann points to a new retirement reality confirmed by research for MetLife which shows changing attitudes among people aged between 50 and 60. Around 54% do not believe they will be ‘old’ until they reach their 70s, with 28% saying they would not be old before age 80. Only one in four (25%) plan to fully retire straight away, while half of 50-60 year-olds (49%) want to work past 65.
She writes: “As retirement becomes a process rather than an event the need for different options for both investment and income streams is growing. Planning flexibly is ever more important and it will also be necessary to find approaches which offer better later life income prospects than can be provided by standard annuities.
Her report calls for new thinking and innovation in investment products and retirement income options. Increased flexibility, which recognises the changes in working life and the increased uncertainty of investment markets, is required. She highlights that even investments previously considered ‘low risk’, such as Government bonds, which are relied on in the run-up to retirement to reduce risk of loss, have fallen by ten percent or more in the last year. The unprecedented policy environment, which has distorted supposedly ‘low risk’ asset prices, means standard concepts of investment risk may no longer apply. This makes investment increasingly uncertain, but workers will not be able to cope with such increased uncertainty.
Dr Altmann highlights the risks of relying on annuities which do not increase with inflation over time. These products will potentially expose millions of pension savers to poor value and later life poverty. She compares the options for retirement income and explains why considering guaranteeing pensions can be an important part of the retirement income decision. People automatically consider insuring their house against risks they hope they will never face but when it comes to their other big asset, their pension fund, most people do not even consider insurance against a fall in the value of their fund, or falling later life income.
