Aon report highlights UK pension savings crisis
UK -- UK employees must come to accept that they will have either to work longer or save more to fund their retirement, according to new research from Aon Consulting.
The research, released today, notes that in the 1980s the average retirement age for males was 65 and the average life expectancy was around 80 giving the average worker some 3.4 working years to save for each year of retirement whereas now the average retirement age has fallen and average life expectancy has risen to the point where the average worker now has only 2.2 working years to save for each year of retirement.
"The combination of increasing life expectancy and reducing working lifetime is a double whammy as far as pensions are concerned - not only does retirement cost more but individuals have less time to save,” said Paul McGlone, principal and actuary at Aon Consulting. “The levels of saving required to maintain our current retirement ages are simply unsustainable.”
He added: "To the extent that young people spend longer in higher education and therefore start work later, the figures look even worse. Things won't get any better unless some fairly drastic action is taken."
McGlone noted that there has been no clear directive from the political parties regarding changes to the state retirement age in the run up to the UK general election on 5 May.
“They have given no answers because the issue is so difficult,” he told IPE. “People are led by the government on the issue and as long as the retirement age is set at 65 they will think that that’s OK. But all projections show that it is not. It would be good to see a political party address the issue.”
The research concluded that to return to a work to retirement ratio of 3.4 would involve increasing average retirement age to 68 from the current 63, and that maintaining that ratio over the next 40 years is likely to require raising the average retirement age to over 70.
Even with a work-to-retirement ratio of 3.4 individuals would need to save in excess of 10% of their salary throughout their working life to retire on a good pension, McGlone said.
The research found that the current work-to-retirement ratio meant that the amount required to save for a good pension is 15-20% of salary and that for most individuals, particularly those without assistance from employers, this was not affordable.
Meanwhile, a Watson Wyatt survey also released today finds that 65% of members of DC schemes have no or very little idea of their likely income in retirement compared with 31% of DB scheme members.
"While clearly it is harder to estimate retirement income from a DC scheme than it is from a DB scheme, it also appears that DC members are less engaged with their pension scheme," said Gary Smith, a senior consultant at Watson Wyatt. "This is a major concern because, if anything, it is DC scheme members who need to take the most active interest in their pension planning."
Smith agreed that there has been no attention pad to the issue during the election campaign. “Neither of the major political parties are grasping this nettle,” he told IPE. “Realistically this is because they are struggling for an answer so I suspect they are trying to brush the problem under the carpet.”
The research found that 65% of DC scheme members felt that saving enough for retirement is going to be very or fairly difficult compared to 55% of DB members.