Andy Briggs: UK is hurtling towards a pensions disaster
Without radical change, Britain will find itself amidst a pensions disaster, with millions worse off, writes Standard Life chief executive Andy Briggs
When the Pension Commission issues its final report in 2027, it must lead to radical change and meaningful action. If this doesn’t happen then millions of people will have poorer retirements, burden on the state will increase and the UK economy will be weaker.
The interim report from the Commission is in line with what Standard Life has been highlighting and talking about for many years. Large numbers of people are not saving enough for retirement and the UK is hurtling towards a pensions adequacy disaster. The report showed that 15m working-age people are not going to have enough money in retirement. Without action this will not change.
Auto-enrolment should be hiked to 12 per cent
We remain optimistic that when the commission returns with its findings it will conclude that auto-enrolment contributions set at eight per cent are no longer sufficient. In many cases what was supposed to be a minimum has become the norm, and the level of personal saving envisaged when the system was established has not materialised.
Auto-enrolment has brought millions more workers into regular pension saving since 2012. However, under-saving is projected to be the highest among people reaching retirement age in the 2030s and 2040s. The UK has replacement rates (the proportion of pre-retirement income you receive in retirement) below the OECD average and the weakest in the G7.
While change cannot happen overnight, we should be setting a clear path towards increasing contribution rates to 12 per cent gradually over time. This could be at an increase of 0.5 per cent each time or one per cent, with a mechanism to delay rises in the event of severe economic turmoil. This needs to be implemented sooner rather than later. Delays will only make this problem worse for the customers and state.
Financial pressures on businesses and households remain throughout the UK so, to implement any change, a roadmap of gradual change is needed to address the growing problem. We need to get things moving. This will help business and savers plan.
UK is an outlier when it comes to pensions consolidation
The report last week also touches on consolidation and this is something else that needs to change in Britain.
The UK is an outlier among advanced economies in retaining a highly fragmented defined contribution landscape. Consolidation improves member outcomes and is not just a focus for system efficiency. It is about unlocking capability and larger schemes can invest more and support bigger infrastructure projects more effectively across the UK. They can provide capital to growing companies while still meeting the primary duty to customers to ensure they get the returns they need. Smaller schemes cannot do this consistently, scale is a prerequisite for investing in growth assets such as infrastructure, private capital and productive finance.
Global evidence from more than 1,000 pension plans over a 30 year period shows that customers and savers benefit with better outcomes from larger schemes. Australia’s Productivity Commission estimated that a lack of scale and system fragmentation cost pension members in Australia around $3.8bn every year in lower returns and unnecessary fees.
UK must catch up quickly
Consolidation will help customers and the economy. Savers and societies in a number of different nations have benefitted from this. Canada has grown into one of the most sophisticated and bigger long-term investors across the globe. The top five Australian “Superfunds” are now worth more than $1.2 trillion AUD, they have shown stronger governance and better performance since moving to a system with fewer but larger funds. The Dutch in recent years have reduced the number of pension funds from 1,000 to 200 and concentrated on assets in large schemes. The International Monetary Fund now describes the system in the Netherlands as one of the strongest worldwide and explicitly links outcomes to scale, consolidation and investment sophistication.
The UK has a lot of catching up to do with other advanced economies by retaining a highly fragmented DC landscape and a relatively low minimum contribution rate. Changes need to happen with urgency and at a much faster pace. The longer we wait, the harder and more costly this issue becomes to fix.
Andy Briggs is the chief executive of Standard Life