Closing the gap between needs and reality

Sifting through research findings on pension provision in the UK can be an emotional roller coaster ride. There are plenty of ups and downs. Some statistics leave you feeling positive and bullish, others downcast and depressed.

The need for a decent income in retirement is blindingly obvious to most people, but there is limited confidence as to how this income will materialise. A good example is a survey by DWP (2006) on attitudes to pensions and responses to a question about expectations of retirement income. Those surveyed answered:

Statement Those agreeing

I have a good idea of what my retirement income will be 10%
I have a reasonable idea of what my retirement income will be 24%
I know vaguely whether I will have enough to live on 19%
I have no idea of what my retirement income will be 47%
Assuming the sample was representative of the UK working population, the depressing conclusion is that the pensions industry has failed to engage or communicate in simple terms, with every 2 out of 3 working people.

But contrast this with responses to the statement ‘I would rather have a good standard of living today than save for retirement’. Only 3% strongly agreed, whilst 26% agreed with the statement. The positive conclusion is that more than 7 in 10 recognise a need to save for old age.

Equally encouraging is that when asked about the main source of retirement income, on average respondents believed nearly 80% would come from state and private pensions.

These findings correlate with other studies to demonstrate a significant proportion of workers believe they have a responsibility and need to save for retirement, but for a variety of reasons they fail to take the plunge.

Pension scheme membership

The Office of National Statistics published two other reports in April entitled ‘Pension Trends’. The report analysed numbers of working people saving, the types of schemes used and how much is being saved. There is a wealth of data, but three issues stand out:

1.The proportion of employees who are members of employer sponsored scheme has changed little in the past ten years. Fifty-five percent in 1997 and 54% in 2006. The ten year period has seen a decline in numbers of occupational schemes, (particularly DB) with a corresponding growth in contract based schemes, personal pension/stakeholder schemes.

2.Average contributions, (member and employer) to ‘open’ DB schemes in 2006, was 19.5% of pensionable salary, compared to 8.9% (member and employer) to DC schemes. It is important to note that whilst a high proportion of DB schemes are contracted-out of the Second State Pension Scheme (SP2), in DC schemes, most members are contracted-in and, therefore, accruing an SP2 benefit.

3.The average annual private pension income for pensioner couples who have reached State Pension Age was just £2,115, in 2005/6, according to the DWP Family Resources Survey. Further, 40% of pensioner couples received less than £1000 a year.

To summarise, numbers of employees in schemes have not risen, indeed in the private sector they have fallen. With the switch from DB to DC provision, contributions have dropped. The private pension income received by pensioners can at best be described as modest.

The way forward

There are 25 million employees (2007 Labour Force Survey) aged 16 and over. Around 11million have no private provision and those in DC schemes on average are not saving enough. Pension providers have to develop innovative solutions to get people into schemes as soon as they are in full time employment. This means overcoming barriers such as inertia, the fear of losing money and recognising the importance of planning for long-term financial priorities.