With the schools now broken up for the summer term, many of us are looking forward to a well-earned summer holiday and have been saving for some time to pay for it.
However, in our lifetime our longest holiday of all will likely be our retirement, but as a nation, we are failing to save anywhere near enough to pay for it.
A survey carried out by the Organisation for Economic Co-operation and Development (OECD) showed that in the UK on average we retire on 29% of the income we were receiving when we were working. Compare that to the EU where the average is 71%, and you can see how far behind we are.
This statistic will only get worse with State Pension Age ever increasing and the decline of defined benefit (DB) schemes – which is seen as the gold standard for pension provision.
How can we rectify the situation? We need to compel people to save more and one way to do this could be to increase the auto enrolment minimum contribution rates for both employees and employers. However, following a recent review, the government has shied away from this idea saying no increases will be made for the foreseeable future following the final changes in April 2019. This, I believe, is a huge opportunity missed.
Another possible solution could be to introduce Collective Defined Contribution (CDC) schemes. The Work and Pensions Committee back this plan following its success in countries such as Denmark and the Netherlands. CDC schemes offer a balance between DB schemes and defined contribution (DC) schemes, sharing the risk between employer and employees while offering an attractive return to employees. I think that CDC has come to the pensions party a little too late in the day and can’t see many employers moving from DC schemes where all the risk is with their employees.
Financial education will certainly help but it needs to be made compulsory in schools and throughout employment.
So, I think we have a time bomb ticking away which no one wants to address and as a consequence I expect us to have huge welfare problems in the next twenty to thirty years. Perhaps we should all go on holiday to Croatia and learn a little something from them. As well as being so close to winning the football World Cup, in Croatia you retire on 129% of the income you were receiving in retirement!
Stuart Price, Partner and Actuary at Quantum