By any measure, the recent Budget felt like a major political set piece and one that may define much of this parliament.
The lead up to it was characterised by division and adversarial politics and, at this point, I think it is helpful to take a step back and look at the positive impact cross-party agreement has had in the past and look forward to how we can work with new policy challenges to deliver for our clients.
The Beveridge Report was published more than 80 years ago in an effort to slay the five evils of the day: idleness, ignorance, disease, squalor and want. It set up the welfare state pretty much as we know it today.
The state pension was intended only to be a safety net – a minimum income below which no one should fall
The state pension scheme was one of the report’s key recommendations and the idea was that everyone should contribute to a system through their working life and receive a pension in return.
The contributory principle was essential: individuals would earn their state pension by paying into the system, avoiding any sense of charity or welfare stigma.
What is not always well understood, however, is that the state pension was intended only to be a safety net – a minimum income below which no one should fall.
The idea was always that savers would keep an eye on how much they would need in retirement and take action to supplement the state scheme with other savings where necessary to build the right standard of living for them.
So what?
Phoenix Group has worked with Frontier Economics to assess the position as we understand it today. Our work highlights that the years 2040 to 2044 will mark a critical period as it suggests, at that point, nearly 60% of those with defined contribution pension schemes will retire with inadequate savings.
Plain and simple, we are not saving enough.
This is a difficult message to get across, especially given the boost auto-enrolment (AE) continues to deliver in terms of the number of people saving for their retirement.
2040 to 2044 will mark a critical period. At that point, nearly 60% of those with defined contribution pension schemes will retire with inadequate savings
Today, nearly 80% of workers are in private or work-related schemes, saving £116bn a year. That number will only rise once changes to the AE rules are made, increasing the number of workers qualifying for AE contributions and bringing the level of those contributions to a more realistic level.
The problem is that timing is crucial. The more the implementation of changes is delayed, the more the benefits to savers evaporate.
People continue to rely on the state pension. It is paid to about 13 million people annually and costs about half the UK’s total benefits budget.
The problem is that the state pension is paid from today’s contributions. This is not an issue if there are enough taxpayers to cover the costs. But as we know, life expectancy has increased in the UK meaning that, eventually, tax paid will be unable to cover the pensions demand.
The state pension is paid to about 13 million people annually and costs about half the UK’s total benefits budget
The implication is covered succinctly by a survey we commissioned in 2022, which found over half of those below 50 years of age said they did not believe there would be a state pension by the time they retire.
Pensions policy is built on security and reliability, not on short-term tinkering. The saver who loses faith in the pensions system might move to other strategies to source a suitable income in retirement – and miss out on employer contributions payable to their AE pot, making the shortfall in their long-term savings even more acute.
A new saver needs to be sure of the benefits they will be building up and how they can be accessed. The fear that someone will pull the rug out from under them just as they are ready to take their income in a way that suits them is a sure-fire way to stop people engaging.
Over half of those below 50 years of age said they did not believe there would be a state pension by the time they retire
In short, we must give certainty – the adviser community is key to this in making sure savers understand what they have and how it can be used to provide a good financial outcome for their future. Working with the rest of the financial services industry to a common goal of making information available and easily understood is crucial.
We must balance the yin and yang of pensions policy: a state scheme to deliver a minimum level of retirement income and a supplementary proposition in which savers can have confidence, and for which they are willing to pay. Balance long-term stability and short-term affordability.
And help minimise the pensions crisis that looms in the next 15 years.
Andy Curran is chief executive of Standard Life, part of Phoenix Group
What I think is being overlooked is that during this period leading up to the 2040’s most of the Baby Boomers will have kicked the bucket. This is the better of generation and they will be leaving very significant sums (notwithstanding the IHT imposts). As John Major put it ” wealth cascading down the generations”. I concede that not everyone will benefit, but a very significant number surely will. So – nil desperandum!