We are in the midst of a pensions crisis.

For a long time, experts have warned that UK adults aren’t saving anywhere near enough money to ensure a comfortable, or even moderate, retirement.

But now it feels as though we’ve reached breaking point. If pensions were a person, it’s probably safe to say they’d be on life support.

Let’s take a quick look at the facts.

Around a fifth of working-age private-sector employees — approximately 3.5 million people — do not pay anything into their pension. And, according to the Institute for Fiscal Studies (IFS), 61% of people who are making contributions are saving less than 8% of their earnings.

This pension legislation merry-go-round has eroded the public’s trust

The IFS has also discovered that 87% are contributing less than 15% of earnings — the amount recommended by Lord Turner’s Pensions Commission when carrying out its review two decades ago.

In addition, separate research from wealth manager Investec Wealth & Investment has revealed that one in four people who previously paid into a pension has stopped. Meanwhile, 12% have “dramatically or slightly reduced” their monthly contributions, with almost half of those surveyed saying they do not plan to restart or increase them.

And there’s a second problem: people taking money out of their pension pots to help either themselves or family members with the day-to-day cost of living.

According to The Lang Cat, last year was the worst on record for outflows from advised platforms, with pensions being “hammered”.

What does this mean for retirement?

All this, of course, means more and more people will have to either delay their retirement, return to work or never retire at all.

Every year, the Pensions and Lifetime Savings Association (PLSA) publishes a report called ‘Retirement Living Standards’ (RLS). The report looks at three retirement lifestyles — minimum, moderate and comfortable — and estimates how much money people will need per year to achieve each level.

The benchmark for minimum auto-enrolment contributions should be 12% because 8% is nowhere near enough

The latest findings, perhaps unsurprisingly, reveal an increase in all three amounts — reflecting the impact of rising prices, particularly in essential areas such as food and energy.

According to the RLS, the minimum amount needed for a “dignified” retirement is £14,400 per year for singles and £22,400 for couples.

This allows for £126 per week for food, one UK holiday, monthly dining out and bi-weekly leisure activities. It assumes people have access to public transport and do not own a car.

Meanwhile, the amount needed for a moderate standard of living in retirement has increased to £31,300 per year for singles and £43,100 per year for couples. Offering “financial security and flexibility”, it provides £225 weekly for food, European and UK holidays (two weeks in total) and financial help for family members.

Finally, to be comfortable in retirement, singles need £43,100 per year, while a two-person household needs £59,000.

This allows for some luxuries such as beauty treatments and European holidays (two weeks), and £291 weekly for food.

It is not the right time [to get people to pay more in] but we should start planning now

The PLSA suggests a savings pot of around £530,000 in today’s money terms is needed to achieve this. That’s in addition to state pension income.

The latest figures from the Office for National Statistics show that the average pension pot for someone aged 65 and over is £81,100.

Those aged between 55 and 64 have built up an average of £107,300, while those between 45 and 54 have saved £75,500.

Those aged between 35 and 44 typically have £30,000.

Overall, 30% of people from the Investec survey admitted that stopping or reducing their contributions would have an impact on their retirement date.

In total, 6% said they wouldn’t be able to retire at all.

The same research from Investec revealed that almost half (48%) of people were worried that their pension savings wouldn’t be enough to last them through retirement.

Our research shows that poorer households may find it challenging to afford higher pension contributions

The stats reinforce their concern. According to Standard Life’s ‘Retirement Voice’ report, 14% of retirees aged over 55 have gone back to work. Almost two-thirds of these said income issues were the driving force.

Another 32% said the reason they had returned to work was that living costs had increased more than they expected.

Why are people not saving enough?

The primary reason people gave for stopping or reducing contributions — or withdrawing money from their pensions — was the cost-of-living crisis.

Another argument is that pensions are just too complicated — despite concerted efforts over the years to make them easier to understand.

Last year, the IFS spoke to more than 3,000 working-age people to examine their concerns about the pension system and investigate their understanding of it.

Only 20% of people aged 25 to 64 could correctly state (to within £20) how much a full state pension was worth in pounds per week, and 58% said they did not know.

One in four people who previously paid into a pension has stopped

Overall, 65% of 25- to 49-year-olds couldn’t answer.

This begs the question: are pensions ‘sexy’ enough for younger people? Do they really care about putting aside money now that they aren’t going to see for another 40 or 50 years?

For many in their 20s, retirement is the last thing on their mind.

And yet, a few weeks ago another report was published by Investec that said people needed to start saving £460 per month during this time to become a pension ‘millionaire’ — in other words, if they wanted a pot of £1m or more when they reached retirement age.

However, with the average salary in the UK being £35,000 — or roughly £2,400 take-home pay per month after tax — that is a huge ask for many.

Even if we assume the average single 20-something is living with their parents — a broad assumption to make — £460 a month is a lot of money to save towards a pension.

Two things are obvious in this UK pensions challenge: cross-party collaboration is crucial, and some form of stability is needed

We’re always being told that Millennials or Gen Z are ‘wasting’ their money on luxuries such as oat-milk lattes, Netflix subscriptions and smashed avocado on toast.

But cutting back on some, or even all, of these things is unlikely to result in £500 of disposable income per month.

What has been done?

We have seen several major reforms over the past two decades, including pension simplification, automatic enrolment, state-pension reform and pension freedoms.

Auto-enrolment, which was implemented in 2012, has been widely credited for getting millions of people saving for retirement who hadn’t previously done so.

The government is currently trying to push through some challenging policy reforms. These include the consolidation of the entire pensions sector into fewer, bigger, better-run schemes that invest more heavily in the growth of the UK economy.

The constant tinkering with pension tax rules needs to stop

It is also trying to deliver the consolidation of small pots, including the possibility of a lifetime provider, or a pension ‘pot for life’.

The reforms would enable savers, rather than the company they work for, to choose their own pension scheme for auto-enrolment.

Under current rules, UK firms are required to set up a pension scheme for employees that meets certain minimum standards. This means many people, as they move from job to job, build up multiple pensions throughout their career, with a growing risk that those pots become ‘lost’.

Advocates of the ‘pot for life’ reforms argue that allowing employees to choose their own auto-enrolment scheme would help solve the £27bn ‘lost pension pots’ problem.

However, questions remain over the cost of implementing the proposals, which could require businesses of all sizes to link up with dozens of providers.

Auto-enrolment has been responsible for getting people to save, but many feel it needs to be reviewed again

AJ Bell believes that pensions dashboards remain “the most obvious solution” to connect savers to their pension pots and, ultimately, enable more people to consolidate. It says the success of auto-enrolment has “exacerbated the challenge of people losing track of their pensions”.

Some estimates suggest the average person changes employer around 11 times during their career, with each job hop potentially creating a new pension scheme with a new provider.

What else can be done?

So, if people aren’t saving enough, but cannot afford to save more, what else can be done?

Auto-enrolment has been responsible for getting people to save, but many feel it needs to be reviewed again.

Currently, enrolment is automatic for adults aged 22 or over, earning a minimum of £10,000. The government is reportedly considering lowering the qualifying age to 18 and starting contributions from the first £1 earned. It is also looking at ways to bring the self-employed into auto-enrolment.

A report by Investec said people needed to start saving £460 per month during their 20s to become a pension ‘millionaire’

It is hoped that removing these barriers — which some thought might have been confirmed in the Spring Budget — could potentially see millions more people saving from an earlier age.

PLSA director of policy and advocacy Nigel Peaple believes that a gradual increase in minimum auto-enrolment contributions, from 8% to 12% over a decade, is the answer.

He says this will ensure “a sustainable retirement savings system through most of the rise falling on employers, so both employers and employees would pay 6% each”.

Standard Life UK chief executive Andy Curran, when speaking at the NextWealth Live conference in London last month, said he thought the benchmark should be 12% because “8% is nowhere near enough” .

Research by People’s Pension shows there could be an appetite for this, with 54% of people saying they would be likely to contribute more if their employer matched their contributions.

Away from auto-enrolment, there have been calls for a long-term savings commission, with the likes of Aegon and Nucleus in particular giving their backing.

The Labour Party said it would review the current state of the pensions and retirement savings landscape if it came into power

The latter has recently written to pensions minister Paul Maynard and his political counterparts to emphasise the importance of such a commission.

Nucleus said there needed to be greater cross-party agreement over pensions and savings policy to ensure that more people could feel confident about their retirement prospects.

Could introducing financial education into primary schools, and teaching children at an early age about the benefits of saving money — as is currently being considered by the cross-party education committee — be another way of engaging people when younger?

There’s also an argument that the government should look more closely at countries that have got their pension system right and take steps to replicate it here.

Each year, the Mercer CFA Institute publishes its Global Pension Index, which compares 39 retirement income systems, covering a wide range of policies and practices.

More and more people will have to either delay their retirement, return to work or never retire at all

For three years in a row, the Netherlands has topped the list of the world’s best pension schemes.

Its retirement income system uses a flat-rate public pension and a semi-mandatory occupational pension linked to earnings and industrial agreements.

Most of the country’s employees are members of these occupational defined benefit plans.

Denmark, which has a public basic pension scheme, a supplementary pension benefit tied to income, a fully funded defined contribution plan and mandatory occupational schemes, came a close second in the list of countries with the best pensions.

Israel, whose retirement income system is comprised of a universal state pension and private pensions with compulsory employee and employer contributions, ranked third on the list.

How long will any changes take?

With a general election looming, we are unlikely to see anything significant happen with pensions in the coming months.

When quizzed about the prospect of a long-term savings commission by The Lang Cat’s Tom McPhail, Maynard’s response was, apparently, “Yes, but not now.”

If the polls are to be believed, the Labour Party is heading for a thumping victory, so it is perhaps unsurprising to hear of Maynard’s wait-and-see approach.

Long-term stability is needed. In fact, it’s never been needed so badly

This poses the next question: how would the future of pensions look under a Labour government?

In its ‘Finance Growth’ report, published in January, the party said it would “review the current state of the pensions and retirement savings landscape” if it came into power.

This, it added, would be “to assess whether the current framework would deliver sustainable retirement incomes”.

It would involve “working with the industry to ensure that pension savers are getting the best possible returns and to identify and address the barriers to schemes investing more into UK productive assets”.

The Labour Party has also indicated support for the current government’s Mansion House reforms and signalled its commitment to retaining the state-pension ‘triple lock’.

For three years in a row, the Netherlands has topped the list of the world’s best pension schemes

If the Conservatives cling to power, their policies could take years to implement. But, whichever government is in charge, questions remain over the long-term future of the triple lock and the state pension.

There has also been talk of radical changes to National Insurance, including scrapping it altogether.

What happens if we don’t act now?

Doing nothing is not an option.

Royal London has warned that the UK could face an even bigger cost-of-living crisis in years to come if we don’t find ways to enable people to increase their pension contributions.

However, the mutual’s director of policy, Jamie Jenkins, acknowledges that “now is not the right time” to do it because of the financial pressures so many people are facing.

Jenkins says that, although any reforms are likely to take many years to implement, “we should start planning now”.

AJ Bell believes that pensions dashboards remain the most obvious solution to connect savers to their pension pots

Oxford Economics director of economic consulting Henry Worthington says research the company has carried out shows that poorer households may find it challenging to afford higher pension contributions.

This poses yet another problem: the pensions ‘gap’ just keeps widening. High earners with more disposable income can pay more into their pensions, while those on a low income can’t afford to increase their contributions.

With the cost-of-living crisis not going away, it’s hard to see that changing soon.

A more stable footing

Regardless of who is in government, two things are obvious in this UK pensions challenge: cross-party collaboration is crucial, and some form of stability is needed.

We haven’t had much of the latter over the past five years or so, both politically and economically.

According to The Lang Cat, last year was the worst on record for outflows from advised platforms, with pensions being ‘hammered’

First there was Brexit, accompanied by the Covid-19 pandemic, and the aftermath of both. Then there was the disastrous Liz Truss/Kwasi Kwarteng Mini-Budget.

We’ve had three prime ministers — two of them unelected — and more Cabinet reshuffles than most people have had hot dinners.

The political revolving door, spinning even faster than usual, has seen pensions ministers coming and going, and policy constantly changing.

Nucleus says this “pension legislation merry-go-round” has eroded the public’s trust in pensions.

It has also called for a stop to the “constant tinkering with pension tax rules”, which it claims is deterring people from engaging with the system.

The success of auto-enrolment has exacerbated the challenge of people losing track of their pensions

With the war in Ukraine still raging, conflict in the Middle East escalating and, potentially, a new UK government in the offing, there doesn’t seem to be much chance of achieving stability in the year ahead either.

Urgent workplace savings reform measures, including increases to contributions, could be proactive first steps towards better pensions for the UK population.

But long-term stability is needed. In fact, it’s never been needed so badly.

Something drastic has to be done to breathe new life into pensions, before it’s too late.

 

 

 

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