The UK is sleepwalking towards a pensions crisis hidden in plain sight, and is less than two decades from reaching boiling point.
Millions of people, including our customers at Standard Life, are at risk of falling short of an adequate retirement income unless steps are taken to improve the amount they are saving for their future.
This can be reversed but we can’t just let it be a problem for tomorrow.
There have been reports that the Government has put their plans to review the adequacy of pension saving on ice.
We hope this is not the case as we need this review to happen as soon as possible for the benefit of millions across the UK.
Modelling from our think-tank Phoenix Insights found that as many as 17m UK adults are not saving enough to retire when they want on the income that they want.
Pensions threat: Standard Life boss Andy Curran wants the government to step in to encourage people to save more for their retirements
And in the next five years, the majority of defined contribution (DC) pension savers will enter retirement with less income than they expect or need, worsening to a peak in the early 2040s.
It is therefore clear that unless policy intervention is taken to address this, the repercussions are severe. It is likely we will see an increased strain on social support systems and a rise in poverty among people approaching retirement as well as those in retirement.
One of the biggest levers we can pull to address the under-saving challenge is increasing minimum auto-enrolment contributions.
Auto-enrolment has been a huge success since its introduction in 2012 in boosting pension participation, with more than 10m extra employees contributing who previously would not have done so.
But the minimum savings levels through auto-enrolment are simply not enough for most people to achieve an adequate retirement income.
Since 2019, the default contribution rate has remained unchanged at 8 per cent for people aged 22 and over, earning above £10,000. It is also critical that those that are self-employed are included in future years so they save for a pension before it is too late.
We understand that employees and businesses are facing cost of living pressures and the recent National Insurance contribution increase could mean some might not be able to afford to raise their staff’s contributions at this time.
However, this shouldn’t stop us building a consensus on how and when we address under-saving. We do not need to reinvent the wheel and there are international examples of higher minimum contributions strengthening savings adequacy we can look to.
Australia, for example, has increased contributions by 0.5 per cent each year since July 2020 and will reach 12 per cent total pension contributions in July.
We don’t want retirement to be a time of worry – it should be a time for enjoyment. The adequacy review is a golden opportunity to prevent serious problems for individuals and the state in years to come.
With the impending retirement crisis about to unfold, the review should not be kicked into the long grass.
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