Time to review how the UK saves for the future

We see a growing number of individuals not saving enough for the future or understanding the likely outcomes as a result. 

Self-reliance may not be enough

Recent Hymans Robertson’s research found that more than half of 55 to 70 year olds are more worried about retirement than they were a year ago. We are therefore encouraged to see that the IFS has called for this review and set a clear timeframe to complete its report and deliver policy recommendations by September 2025. 

The decline of defined benefit (DB) pensions, coupled with the introduction of pensions freedoms in April 2015, leaves an ever-increasing number of individuals with defined contribution (DC) pots which they will need to rely on as their main source of retirement income. Unfortunately, many individuals are not engaged with their pensions, do not understand what they have now, if it will be enough in retirement and what their next steps should be to improve their outcome where this currently is inadequate.

Nearly half (47%) of individuals we surveyed are not confident they can make a strong plan for retirement. Support and interventions in all of these areas will therefore be required to improve member outcomes. 

The role of government 

Policy interventions which have encouraged improved outcomes – including the introduction of auto enrolment (AE) and planned developments to include more individuals within this through the reduction in the starting age to age 18 and the removal of the offset to qualifying earnings (ie £6,240) – have and will help ensure most individuals are saving for their retirement. 

The report highlights the lack of saving amongst the self-employed, but the focus should also be on those away from work, for instance, carers. We strongly suggest this is included within the review. 

Auto enrolment alone will not fix the pensions equality gap nor pension poverty if there is not an employer to enrol these individuals into a pension scheme.

What else can be done?

While these interventions have made some steps in the right direction, they are not enough and more needs to be done to achieve an adequate income in retirement for pensioners.

The report highlights low contribution levels of saving for those in the private sector across individuals of all income levels. Yet, increasing AE contributions levels above 8%, to levels of 12% or more, will have a more meaningful impact on members’ accumulated funds. Though careful consideration of the affordability of this will need to also be considered in the current cost of living crisis.

A review to determine the best way to increase engagement and understanding of the risks of pensioners managing their pots through retirement could not be more timely. 

Data from the Financial Conduct Authority showed that more than 700,000 new DC retirement pots are accessed each year, with a total value of over £45 billion being accessed highlighting an upward trend in the volume of both retirees and pot sizes that are entering the retirement stage. 

Making informed choices

A key driver to making the right choices will be through receiving adequate guidance. This presents an opportunity for providers to consider how best to empower individuals to make better decisions about their pension. To date evolution of proposition sophistication has been slow; there has been a lack of strong regulatory direction on aiding customers on a sustainable income. The review should address both of these issues. 

It is clear to see that Pension Wise is already having a positive impact on the members that do make use of the appointments. Future policy recommendations must be introduced to explore a trialling automatic booking of appointments with Pensions Wise for all individuals approaching retirement. 

All stakeholders have work to do

While the review from IFS shines light on the need to change, the review alone and recommendation of policy intervention will not instigate change unless participants across the pensions industry are involved and aligned in views and needs to help improve member outcomes. 

To deliver the level of change needed to address poor outcomes for DC members, four key participants must all take action: 

• The government who will be crucial for the effective implementation of any future policy change. Without early engagement with the government, we risk policy recommendations not being supported.

• Providers who need to drive product innovation and improve customer support and guidance.

• Employers who are responsible for the design of the pension benefits they offer for employees and able to consider the adequacy, efficiency and equality of these designs.

• Regulators who should go further in providing a clear and effective framework for delivering member guidance within the pensions industry 

We would like to see the IFS considering each of these participants and the benefits each can bring to supporting the change required to improve member outcomes as part of their continued work. 

Hannah English is senior DC consultant at Hymans Robertson