While the UK had the second-largest stock of pension assets in the world in 2021, it is some way behind Australia, the US and Canada in its journey to a fully formed defined contribution (DC) system, according to the Pensions Policy Institute (PPI).
Pension assets in funded and private pension plans amounted to $60.6trn at the end of 2021, an increase of 7% on the previous years. These assets are highly concentrated, with over 90% of assets in seven countries – the US, Canada, UK, Netherlands, Switzerland, Australia and Japan.
While the UK stock of pension assets was the second-largest in the world in 2021, only 19% of pension fund assets are in DC. In comparison, Australia holds 87% of assets in DC and the US holds 65%.
The PPI said that these systems, as well as that in the Netherlands, are further into the process of drawing drown pension assets than the UK, using benefits paid as a percentage of GDP measure.
And while the UK pension system is “well-regarded” in global comparison, according to the PPI’s latest research report, the UK’s score could benefit from the restoration of the requirement to take an income stream and raising the minimum pension for low-income pensioners.
Previous global reviews have recommended that defaults to hybrid or multiple retirement income solutions are needed for DC pensions to balance flexibility with protection.
Workplace DC pensions as a wider pensions system
Workplace DC pensions sit within a wider retirement income system of state and other private pension systems, and regulations on their access and use. The PPI said that both the Australian and Dutch policy and regulation have recognised the need to segment retirees with regard to their financial situation and preferences.
Australia has focused its DC policy on middle-income earners as the primary target group, as they will not be able to maintain their living standards in retirement by relying on the state pension alone, whereas lower-income earners can maintain (if not improve) their retirement living standards through just the state pension.
Higher-income earners are more likely to accumulate sufficient wealth to meet their needs through pensions and other voluntary savings, the Institute stated.
The regulators in Australia and the Netherlands are now requiring providers to research their members and tailor their offers to those most appropriate for the differing segments within their membership and, in the case of the Netherlands, also to alert retirees to choices that might not be optimal.
However, outcomes in other countries may not transfer to the UK system in the same way, as each has its own unique retirement income system, it said.
The PPI said that using a framework to compare other systems with the UK aids the assessment of how lessons from other countries might best apply.
It pointed out that the UK system has very specific features that need to be borne in mind, particularly when considering the role of workplace DC pension assets in individuals’ future retirement finances, such as the 25% tax-free lump sum, the relatively low replacement levels delivered by the UK state pension, the current importance of accrued defined benefit (DB) entitlements for many of those currently at or near retirement, as well as the high but declining level of homeownership of retirees.
The PPI said that consultation and regulation should stay ahead of the market to ensure that frameworks are established and a consensus is formed to enable consumers to be properly informed and empowered to make good choices, and be protected against new or unexpected risks.
It added that the UK has the opportunity to learn from the different approaches of Australian and New Zealand regulators to initiating or adopting strategies and gaining consensus around how to improve consumer support and guidance at retirement, and from Denmark and the Netherlands in regulating the journey to variable income lifetime annuities.