school report: Top of the class or could do better?
21 November 2018
Looking at how we compare with our peers around the world provides a mixed picture for Future Pensioners in the UK. Bob Scott looks at what the UK can learn to get a top grade
Retirement standards and pensions systems around the world are regularly ranked and rated, giving policy-makers and pensions industries in different countries a chance to reflect on areas of success or those that need improvement. A number of recently-published indices put the UK firmly mid-table: not bad, could do better.
A mixed performance
For example, The Nataxis Global Retirement Index ranks the UK 17th in its Top 25 global league table – placed above France and Japan but below countries including Switzerland (at #1), Australia (#6), Ireland (#7) and Germany (#13). This is based on a range of measures, from quality of life and health to material well-being and financial position in retirement.
Of course, not all of these measures are within the industry’s – or even policy-makers’ – direct control. But it is worth noting that while the UK scores highly in health and quality of life, its lowest score is in the Index’s “Finances in Retirement” section, where it scores only 57%.
Learning from the best in class
With the adoption of auto enrolment in 2012 things should hopefully improve as the minimum contribution levels increase.
However, to achieve a significant improvement in the standard of retirement, there is a strong argument in favour of greater compulsion. Although auto-enrolment has got off to a good start and is being ramped up, it could go further to help more people – particularly those who are low earners or self-employed – start saving in a more measured and regular way.
There remains much to learn from other international models, such as Australia, which gets a top score on the “finances in retirement” index and where compulsion has been par for the course for many years. There, employers now contribute 9.5%, and this is due to hit double-digits soon, rising to 12% by 2025. Meanwhile the UK will be raising the minimum contribution levels for combined employer and employee contributions to 8% for workers next year.
That is still nowhere near enough. A new report by Fidelity argues that UK Future Pensioners should be saving 13% of annual household income. At LCP we have long maintained that we should be looking at a minimum of nearer 16% in the longer term. Further, a fundamental flaw in the auto-enrolment model is that it can be opted out of, which heightens the possibility of poor (or non-existent) retirement strategies being adopted.
There is some good news though. When it comes to the share of income that Future Pensioners need to save for an adequate retirement the UK is ahead of its peers in Germany, the US, Hong Kong, Canada and Japan who all need to be putting away an even higher proportion – up to as much as a fifth in Germany.
Empowering and energising Future Pensioners
As with school work, compulsion is all very well but positive engagement is vital too. Our recent YouGov poll found that 59% of British adults know little or nothing about their lifetime savings options - such as company or private pensions, ISAs and other savings accounts - while only 35% feel they are fairly or very knowledgeable in this respect. This lack of engagement and understanding is a real concern.
Without the correct educational system in place the Future Pensioner will simply not be able to make a sensible, informed decision about retirement saving, no matter how proactive the Government is in supporting them – through compulsion or otherwise.
Aiming for a top grade
So overall: a good effort, but more work is needed to achieve an all-round top grade. Like a school report, such analysis should give us the impetus to build on our successes and focus on areas of weakness, learning from other international models where possible.
We owe it to our Future Pensioners to tackle the weaknesses that remain in our pensions system and to help them ensure they are saving enough for a comfortable retirement. We owe it to them to do everything we can to make the UK world class. If the Aussies can do it, then we can too!
About the survey
All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2008 adults. Fieldwork was undertaken between 22nd - 23rd August 2018. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).