Rethinking pensions: 10 years to turn crisis into opportunity
July 27, 2021
PwC’s 2021 Pensions Conference explored the crisis facing the pensions system, and how to resolve it.
Is crisis too strong a word? After all, defined benefit (DB) scheme surpluses are growing and more stringent regulation of future funding is on its way. And looking ahead, auto-enrolment has taken the number of people with defined contribution (DC) plans beyond 22 million. But such figures mask a reality of pension provision in the UK no longer being fit for the future.
Many DC pension pots are inadequately funded. With barely 10 years to go before the first generation of DC workers retire, their pension pots are worth just £50,000 on average. This compares to £400,000 for the average capital value of a DB scheme member’s benefits. £50,000 is clearly not enough to cover the cost of living expenses and social care in retirement, especially with people living longer. The pension system is also unfair, with typical employer contributions of 5% for those in DC schemes compared to up to 40% of pay for DB colleagues.
The prospects for generations down the line are even worse. DC plans depend on many years of regular contributions and good investment returns. Yet people in their thirties and forties often find themselves suspending or reducing contributions to meet other financial priorities such as getting on the property ladder. Saddled with an average £48,000 in student debt, people coming into the workforce may not bother with a pension at all or delay until the advantages of an early start have passed.
Disillusioned and disconnected
Underlying issues highlighted in polling at the conference include a lack of understanding about how much people need to put aside. Many young people also frequently switch jobs, which diminishes the value of pension provision among both employees and employers.
Bringing young people into the system won’t be easy. Many are justifiably angry about the inequalities they face in comparison to older generations who benefited from free higher education, relatively cheap first-time property prices and DB pensions. And despite this the Government is still looking at reducing the tax incentives supporting pensions savings. If pensions are facing a crisis of institutional illegitimacy and leadership, it’s among young people that the erosion of value and trust is most pronounced.
Finding a solution
In 2019, PwC worked with the Group of Thirty on a report on Fixing the pensions crisis. The study presented three priorities:
- Increase retirement age and strengthen employer responsibility for employing and empowering older workers.
- Increase private savings and/or taxation to support public pensions.
- Lower expectations of the income needed in retirement for mid/high income earners, while protecting these ‘replacement rates’ for lower-income earners.
The big question is how to achieve these objectives in practice. We’ll be exploring potential answers in coming blogs, challenging whose responsibility it is to effect change and exploring the role technology and disruption will play.
Whatever the solution – or solutions – there is no time to waste. Yet with urgency comes an opportunity to create a system that works for everyone.
If you have any comments or would like to discuss the issues raised in this blog, please get in touch.