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Addressing the UK's retirement savings shortfall

Simon Barker

Group Chief Executive

Presents Aquila Heywood's submission to this year's Parliamentary Review focusing on the Savings Gap

4 October 2017

There is no hiding the fact that the UK population is underfunding necessary private savings for retirement by £850 million per day (£310 billion in 2017). Only half of our population in their 30s and 40s are saving adequately for later life. A quarter of the self-employed are not saving anything at all. Although auto-enrolment has created seven million new savers, the fact remains that contributions remain below what is required to achieve a survivable retirement income.

Countries such as Australia faced the reality of an ageing population and reformed pensions decades ago, and employer contributions stand at 10% (UK stands at 1%), with a third of their employers contributing more than the minimum.

In the UK, taxpayer liability is increasing and the gap between savings and need is widening. An entire generation across the UK, especially the population across South East England, will be renting throughout their working life and retirement, so will not be investing in bricks and mortar. The average 55-year-old has six times the wealth in home equity than in a pension – citizens in their 20s and 30s will have no resource for home equity release products in later life.

Improvements in diet and healthcare means that someone in their 30s today will live into their 90s. Current pensions were not designed for decades of retirement.

The UK has begun steps toward positive change, and workplace-pension auto-enrolment has resulted in almost two million employers offering pensions to their staff for the first time. More pension providers are offering good-quality products at low charges, delivering better value for consumers who will see far less of their savings eaten up by fees. But it is not nearly enough: substantive change is essential if a retirement savings crisis is to be averted.

The solution

Mandatory employer contributions must be increased, with no employee 'opt-out' allowed. The current plans are an encouraging start, but their success needs to be built on through increased contributions, possibly as a result of auto-escalation. This should include the self-employed. Given GDP growth and inflation compared with flat wage growth, such a decision would reward all employees and benefit the State without negative impact to tax receipts.

Personal responsibility has a role to play. Tax incentives must be protected to reward all voters for reducing their future liability on the State. Great care must also be taken with medium-term savings products such as the new lifetime ISA; we should carefully consider reasons one can 'cash in'. The problem with medium-term accessible products is that there will be too many opportunities to spend – the cost of children, divorce and depreciating assets.

To change people's savings behaviour requires a new approach to engagement. The UK population is disengaged from the pensions industry, and rarely considers retirement saving until their 40s. People are different – from their attitudes to money to their level of financial understanding, their aims for later life, their careers, where they live and their family status.

Providers must correctly engage with all taxpayers on a personal level – not just to give a message exclusively of retirement and old age (where there is a natural emotional inclination not to engage), but to provide digital resources to assist voters attain financial goals across an entire life journey.

Simon Barker is Group Chief Executive at Aquila Heywood, the largest supplier of life and pensions administration software solutions in the UK.

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