No time to lose: Repairing the pensions system
November 17, 2021
We have less than ten years to repair a broken pensions system. What can we do in the time available?
In an earlier blog, my colleague Jeremy May looked at why the pensions system is now in crisis – unfair, in many cases inadequate and increasingly disconnected from disillusioned younger generations.
The big question is how to get the system back on track. We need rapid and radical solutions now, rather than just kicking the can down the road.
Not enough to live on
Why the desperate urgency? It’s less than ten years before the first generation of defined contribution only pension savers reach retirement age. With an average of only around £50,000 in their pension pots, most won’t have enough to live on for long.
Moreover, another ten years of no or low contributions among younger workers could also see them facing severe pension poverty in later life. We need to re-engage with young people and encourage them to start saving now, to benefit from the power of compound interest.
Concerted action needed
Who should take the lead in sorting out the pensions system? We put this question to the industry professionals attending our 2021 Pensions Conference. Most believe it’s the Government’s responsibility. But can the Government do it all on its own? Does it need to support people as they re-think what retirement means? Are there ways to ensure people at typical retirement ages have access to good, flexible jobs that support a good quality of life? Can it do all this in time?
More feasible, and swifter, is concerted action by Government, employers, providers and people themselves:
Could it now be time to rethink retirement? As people live longer, it could become more common that people work for longer or at least transition into retirement rather than stopping straight away. This would not only enable people to support themselves through work for longer, but also see them need less of a pension pot and be able to put more away for when they do finally retire.
Could it also be time to move away from one-size-fits-all retirement provision? There are opportunities to create more flexible, relevant and personalised solutions to take account of such factors as career breaks, increased mobility, contract work or diversion of savings (e.g. paying for childcare or housing deposits).
Providers can play a key role by developing investment and savings products that are easier for people to understand, better value for money and more tailored to their different demands and appetite for risk.
Once people retire, there are also opportunities to help clients manage their finances more efficiently through options that combine drawdown with continued fund management.
As we’ll explore in a coming blog, digital innovation and insight would make it easier to offer these kind of customised solutions, while containing costs and fees.
The pensions lottery currently delivers winners and losers amongst employees. Government could rebalance this by making it easier to pool resources, particularly among smaller defined benefit pension schemes. Additional tax breaks and flexibility for younger workers may also help to stimulate savings at younger ages.
Let’s get moving
So, the system is fixable. But action can’t wait. If you have any comments or would like to discuss any of the issues raised in this blog, please feel free to get in touch.