Sometimes You are Lucky to be in the Older Generation

Today (well today as I write this not as you read it, I’m not that organised) is #olderpeoplesday. To be an official day you have to have a hashtag now. Somehow #Easter and #Christmas don’t look quite right. That’s probably because I am what the organisers of #olderpeoplesday had in mind. Anyway I digress. Let me just unwrap a Werthers (other brands of old people sweets are available!) and get back to the point of this. The older generation always have a hope that what they leave behind will leave the younger generation better off than they were. Well that’s the wishful thinking approach because when you look at the financial position we are leaving for our children and our children’s children they are going to be much worse off than us.

I am not going to dissect every financial option out there, I work in the pensions industry and there is more than enough going on there. I have to credit the Royal London survey “Pensions Through the Ages – Generation 2050 and beyond”. It contains a lot of material that gives you food for thought (and a blog).

Like any survey it has plethora of facts and figures and I’m not going to pull all of them out and dissect them, Royal London do a pretty good job of that themselves – go read it. I am just going to look at an area that stood out for me, how do we get people saving enough for their retirement?

There’s a lot of work going on at the moment with Government consultation on “Strengthening the Incentive to Save: a consultation on pensions tax relief” bringing it to focus. But where are we? At the moment there is a disconnect between what we are going to want to spend in the future and what we are going to have to spend. The Centre of Economics and Business Research set out that today’s retirees currently spend an average of £1,183 per month. The level of income to support this level of spending in 2050 will be £2930, up 148%. OK so we need to see income in retirement increase to allow this. Easy really. Well not quite.

It is clear that people are saving. The problem is that they are not saving very much. According to Royal London’s analysis the average sum saved for retirement by those with a pension under the age of 30 is only £6,000 and for those in their 30’s it rises to £14,000. If you retire today at 65 you can probably expect to live until about 90 – hence ignoring inflation, pension increases and investment returns etc merely to keep the maths simple (I’m not an actuary) you would need roughly 25 x £1,183 x 12 = £354,900. In our current low real interest rate environment, those in their 30’s are going to have to go some…

So what about the shortfall? There seems to be a realisation amongst the younger workforce that pensions will not be sufficient. They are looking to part time work, investments, selling possessions and renting out a spare room to supplement retirement income. The problem is that this is unlikely to adequately make up any shortfall.

Let’s consider auto-enrolment. On the face of it this has been very successful with workplace pensions membership rising from 32% to 49% and an opt-out rate of only 9-10%. But let’s look at another stat from the Office for National Statistics (ONS), and this one is breath-taking.

According to the ONS figures, there has been a near-50% reduction in contribution rates in 12 months. The average amount being paid into private-sector workplace pension schemes fell to 4.7% of a worker’s salary in 2014, when a year ago it was 9.1%. The figure of 4.7% is made up of a typical employee contribution of 1.8% of eligible pay, plus a contribution from their company of 2.9%.

So we have a double whammy of an increased spending gap by 2050 and a reduced pension pot that at some point will need topped up considerably to make up a shortfall (even if it is just to make that part time job in retirement less stressful).

The press have not been slow in the uptake here either. Articles with headlines such “Pension Drive threatens to be too little too late” are coming out and highlighting this issue.

What’s the conclusion? The good news is that more people are aware of pensions. The bad news is that they are not saving enough for it. Education is working in part but it does not currently do enough. The stark messages about shortfalls in savings and income v spending expectations need to be reinforced. I am sure people would save more if they were incentivised to do so but in reality is that going to happen? The current tax system leads to £42bn in tax relief for UK pensions – but still it isn’t delivering high levels of saving. Getting back to the stats people will save more if they take advice. The problem is that they won’t pay for advice (or at least are only prepared to pay £253 for it – yes another stat). So it comes back to the Government and the Industry engaging the workforce and educating them. To that end I was encouraged to see reports coming out of the Tory Party Conference from Mark Garnier MP who is on the Treasury select committee (as reported in Money Marketing). Speaking at a fringe meeting, he commented that the finance industry should get in to schools to support financial education. Now I may think that a partnership between Government and Industry would be ideal here, the fact that the lack of education is reaching upper levels of Government is a great place to start the dialogue. Although, as education is a devolved matter we’ll have to wait to see who else is listening. When I retire I will look forward to a comfortable retirement built up by my DB and DC pensions. Let’s hope those under age 40 now don’t have to look up retirement and pensions in the history books to see what all this means.