Steve Webb, partner at LCP and the UK’s former pensions minister, has published a report – The ski slope of doom - is this the most worrying chart in pensions? – which claims that the incomes of newly retired workers are set to fall at a much more dramatic rate in the coming decades than had previously been thought.
The report found that for those working in the private sector, the decline of traditional “final salary” type pensions is more rapid than previously thought and that the rise of new “pot of money” workplace pensions will take longer to make a real impact than previously assumed.
Together, these two factors combine to create a downward slope in at-retirement incomes which has been dubbed “the ski slope of doom”.
“We have been living in a fool’s paradise when it comes to incomes at retirement. For years, salary-related pensions from private sector jobs have supported the incomes of the newly retired, and men in particular. But these pensions are disappearing much more rapidly than we thought,” Webb said.
He added that new-style workplace pensions are “not being built up quickly enough to take up the slack”. “We need a step change in the urgency of pension reform,” he said.
Webb explained in the report that “until now, the assumption (or hope) has been that the ‘legacy’ of past service in DB pensions will tide us over until new DC rights grow to take their place.”
The report showed, however, that this assumption is wrong for three reasons:
- Past modelling has “lumped together” around six million public servants such as teachers, nurses and civil servants, who are still building up good salary-related pensions, with tens of millions of private sector workers, the large majority of whom are not building up any salary related pensions. The resultant average figure does not provide enough information about either group.
- Figures that show how pensioners as a group are faring relative to workers have been an average over all pensioners, and have not focused just on those retiring today. Nnot surprisingly, newly retired pensioners tend to be better off than elderly widows, and this tends to raise the overall average of pensioner incomes year-by-year, creating the assumption that pensioners are doing well as a group but this disguises the fact that in future the newly retired will be getting steadily worse off.
- Although automatic enrolment has brought around 10 million extra workers into pension savings, mostly into new “pot of money” pensions, these pots will take a very long time to be reflected in meaningful at-retirement incomes. The mandatory 8% contribution was only finally introduced in 2019, and it will be decades before the majority of newly retired pensioners will have a meaningful pension based on that rate of contributions.
The new report brings together new LCP modelling of private sector salary-related pensions with new estimates from the Pensions Policy Institute of future “pot of money” pensions to show the dramatic change over coming years. In particular, men – who have in the past received the lion’s share of private sector salary-related pensions – will see their real incomes at retirement fall dramatically, whilst women’s pensions will rise only slightly.
Male pensions at retirement are currently substantially more than female pensions, and that gap will grow slightly in the next few years, the report found. But after this, male pensions will fall sharply relative to earnings. Women’s pensions grow slightly, mainly because of improvements in state pensions, it added.
A key driver of this result is the decline of private sector salary-related pensions.
Historically men have dominated income from private sector salary-related pensions, whereas in the public sector there are more women than men building up salary-related pensions. However, this means that as private sector salary-related pensions die out, it is male pensions which slump as a result, the report added.
Further analysis of future “pot of money” pensions contained in the report shows that the decline in traditional salary-related pensions in the private sector will not be offset for years to come by new-style workplace pensions.
“Unless urgent action is taken to increase the pace at which new pensions are being built up, a whole generation of people will retire on lower incomes than previous generations or will have to work longer before they can afford to retire,” Webb stressed.
Nigel Peaple, director of policy and research at the Pensions and Lifetime Savings Association (PLSA), said: “Automatic enrolment has been the most successful pensions reform in a generation, however as Steve Webb points out, contribution levels are too low to ensure everyone will have a comfortable income in retirement.”
Peaple mentioned PLSA’s own Retirement Income Adequacy report, which showed that only about half of savers are on track to achieve the retirement income targets identified by the Pensions Commission.
“When you only consider people with defined contribution or “’pension pot’ pensions, the type now most commonly used, well over 90% of people will fall short,” he added.