WE ARE heading towards a serious pensions problem. That much, the experts agree. In the UK alone, some estimates suggest the nation should be putting aside an extra £300bn each year if today’s workers are to enjoy a decent standard of living in retirement. That is the size of the current savings gap – or shortfall in pension savings.
Contrary to popular belief, consumers are willing to save more for retirement. But they are at a loss as to how to go about saving and how much they will need. With demographic change and the pressure on public spending, it is clear that state pensions cannot provide a complete solution. In addition, companies can no longer afford the generous defined benefit schemes of the past.
So the onus is on individuals to make up for this shortfall if they don’t want to see their living standards sharply decline when they retire. But private pension saving is moving in the wrong direction. According to government figures, saving into private schemes – both company schemes and personal pensions – fell from £25.9bn in 2007 to £22.9bn in 2009, and the average total pension pot in the UK is only £26,000.
Planned pension reforms and eventual economic recovery should help improve the situation. But conventional wisdom suggests that consumers are simply unwilling, or unprepared, to save enough. In fact, our research concludes that UK consumers are deeply worried about the future and very willing to save more. The real problem is that they do not know how to go about it, not least because they lack the information they need and face a difficulty in getting good, impartial advice.
Life companies have traditionally been the home for long-term pension savings in the UK. But the complexity of their products, and mistrust engendered by the old commission-driven sales approach, has alienated consumers. As a result, much of the money that UK savers do set aside now goes into bank accounts or Individual Savings Accounts (Isa). Isas have the merit of being simple and easy to understand, and £54bn went into this form of saving during the 2010-11 tax year. Unfortunately, more than two-thirds of that went into cash accounts – the worst asset to be in when inflation is high. Equities are much more suitable long-term for pension saving and this is where life companies traditionally invest money for pension savers.
A recent survey of retirement services in 15 countries demonstrates the extent and nature of the savings problem. The vast majority of people are very worried about their financial situation after retirement: 60 per cent think they are not saving enough and nearly three-quarters believe state pensions will not compensate for this. Over 90 per cent know they will have to rely partly or wholly on their own savings and they are more than ready to put money aside. In fact, more than 40 per cent would be prepared to save up to a fifth of their annual income.
But when it comes to taking action, savers are confused. More than two-thirds are unsure how much they should save to guarantee their standard of living in retirement. For advice, people are most likely to turn to either independent financial advisers (51 per cent) or family and friends (44 per cent). And the majority don’t understand what life companies have to offer for pension savings and don’t believe they offer unbiased advice.
If they are going to change this, life companies will need to recognise who their real customers are. They have traditionally operated on the assumption that pensions and other long-term savings products were sold, not bought. As a result, the industry geared its products more to the commission-driven sales forces that sold them and less towards the consumer or policyholder. The Retail Distribution Review is set to change that; banning commission on sales means there should be more focus on whether the product offers value for money.
Traditionally, life insurers have been the key players in the long-term savings and pensions market, so solutions to the pensions problem need to involve them. But unless the industry does a better job of educating customers about what is on offer and provides simple, cost-effective retirement products which are easy to buy, they may find the world passes them by.
Graham Jackson is a senior executive at Accenture’s financial services group.