In this edition we focus on the latest, and one of the most illuminating, industry reports to warn of the imminent deterioration of retirement outcomes, principally as a consequence of wholly inadequate Defined Contribution (DC) saving.
The Ski-Slope of Doom
When former Pensions Minister (and the UK's longest serving) Sir Steve Webb publishes a report as evocatively entitled as The Ski-Slope of Doom,1 you tend to sit up and take notice. Even more so, when the report's central tenet suggests that we're almost at the point of peak pensions, after which the state pension will increasingly become the mainstay of most retirement outcomes. This, despite the UK state pension equating to less than 30% of pre-retirement income for the average UK earner,2 having been designed to provide no more than a basic standard of living in retirement.
What exactly do the numbers tell us?
The bottom line of this revealing report, which really gets behind the high-level numbers, is one with which most pensions practitioners are all too familiar. Over the next 25 years, in the absence of a dramatic increase in contribution rates and stellar long-term investment performance, DC simply won't substitute for the abrupt decline of private sector Defined Benefit (DB) pension rights,3 notwithstanding the undoubted success of automatic enrolment and the roughly 10.5 million people who have been brought into pension saving since 2012.4 This will be especially true for men who have, to date, been the main beneficiaries of private sector (although not public sector) DB pensions - at least those of a certain age. Indeed, excepting those men who will be newly retired over the next couple of years and "will probably have the highest incomes of any generation before or since", the real income at retirement of newly retired men over the next two decades (who will be largely, if not exclusively, reliant on their DC pension pots and the increasingly central role of the state pension) looks set to fall by around 20%.5 By contrast women, on average, should fare a little better by virtue of their ever greater participation in the labour force, their take up of auto enrolled pensions and the recent equalisation of State Pension age (SPa).
1 The Ski-Slope of Doom - Is this the most worrying chart in pensions? Sir Steve Webb. LCP. April 2021.
2 The UK state pension has a post-tax replacement ratio for the average earner of 28.4%. OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris.p.155.
Important information
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