UK pensions are at a point of inflection. Image: Tim-e via iStock
UK pensions are at a point of inflection unlike anything the industry has seen in the last 25 years.
They have flipped very quickly from defined benefit (DB) to defined contribution (DC), and with the levels of contributions currently going into DC, the regime is no longer fit for purpose.
Auto-enrolment has been a great success in getting millions of people to save into their pension when they otherwise wouldn't have done so. However, perhaps understandably given the pandemic and cost of living challenges, contributions have not increased enough to provide adequate pensions for retirement. This hasn't presented an issue to date as the "DC generation" isn't retiring at scale yet, however, but it will inevitably begin in the next five years.
Absent change, many will be retiring with a considerably lower standard of living than they perhaps expect – possibly into poverty – and some may not be able to retire when they want to. The UK is facing a material retirement challenge.
On member engagement, the pensions industry has the opportunity to use technology to get people more engaged in their pension. However, with some notable exceptions, much of the industry has under-invested in administration systems, and it will take a significant step change for systems to be ready for technology that can increase engagement with pensions.
Actuaries will need to further upskill to ensure they can manage the required data science and technology progress expected over the coming years.
However, we should remain positive. Not least because of the talent in the industry – with the right mindset and by working together we can make the changes necessary to build on the strong foundations in place and deliver a more sustainable UK pensions system.
We also have the benefit of significant over-funding (around a quarter of a trillion pounds) in the DB sector with which change can be supported.
Below is a framework for consideration to help deliver the change that is needed:
- Be bold. The change necessary to future-proof the industry requires bold action in terms of what can be changed and achieved. While many thought them impractical, the Tony Blair Institute (TBI) proposals showed that the status quo need be no barrier to considering what could be done. We must be bold in how we think about the pensions system of the future. We may also need to question perceived wisdoms, such as the "gilts plus" discount rate model that exists for DB pension funds. This model has served us well to date, but may not be the right model for the future.
- Discuss, listen and collaborate. It is important to consider the importance of open discussion, engagement and debate in driving change. Collective Defined Contribution (CDC) may be part of the answer for the future of pensions, but too often it can feel like the CDC debate has become polarised into the ‘for' or ‘against' camps, with little opportunity for discussion. There will be no silver bullet solution, so to keep moving forward, decisions will have to be made on the basis of the ‘best we have' thinking.
- Address disparity for the long-term. The intergenerational wealth disparity in many parts of the UK are clear, not least in pensions. On average, the (older) DB generation have greater pensions wealth than the (younger) DC generation. Pensions wealth transfer will be challenging, and will need to be carefully considered to address the disparity while avoiding inadvertent impact on those in either regime. Any changes will need to take a long-term view to driver better outcomes across the entire UK pensions sector.
There will be no easy solutions, and in any new regime or change we need to consider those that benefit and those that may not, ensuring we make the case for change clearly.
However, coming together as an industry, there is the possibility to build a sustainable, fair and robust pensions regime in the UK that can enhance the retirement outcomes for many.
Paul Kitson is UK pensions consulting leader at EY
This article comes as part of Professional Pensions' PP Pensions Commission – which is looking to bring together industry opinion and ideas on the future of pensions ahead of the general election on 4 July.
Send your thoughts and ideas to the PP Pensions Commission via email to [email protected]
