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Is this as good as it gets?

We regularly hear about deficits faced by defined benefit (DB) pension scheme sponsors and the shortfall in income faced by employees in defined contribution (DC) schemes. Whilst figures are frequently placed on the size of DB deficits, DC shortfalls seem relatively unquantified.

Rising longevity, the decline of more generous DB pensions and the fact most DC members see a pension pot shortfall as an issue for far in the future, makes the sense of pessimism about retirement income prospects for young adults unsurprising.

A recent report by the Resolution Foundation to mark the 15 year anniversary of Adair Turner’s Pension Commission asks us “Is this as good as it gets?”.

We all know the government’s response to the Pension Commission saw the Introduction of the flat rate Universal State Pension and pensions auto-enrolment. Since then, Freedom and Choice has increased the awareness of cash available from pension schemes. The Resolution Foundation report draws out some interesting inter-generational differences.

Will we get ‘enough’?

Currently one third of the population is in receipt of the State Pension and this is anticipated to increase to 50% of over 65s by 2065. With the State Pension age due to increase gradually to 68 and the newly-introduced State Pension being more generous than the one it replaced, for baby boomers and women in particular, this will mean a more even distribution of State Pension income within generations.

Membership of DB schemes will reduce over time from 29% in 2016 (it was 47% in 1997), increasing the reliance on auto enrolment into DC schemes. Despite the large fall in DB pension income, the overall picture is a positive one. DC provision will play an increasing role in bringing retirement incomes for millennial or Generation Y men back toward baby boomer levels, and to increasingly improve provision for women.

The Pension Commission also recommended a Minimum Income Standard for overall retirement income should be two thirds of pre-retirement income. Recent experience shows 20% of those born 1945-1947 fail to meet this level but 77% are expected to fall short after 2020.

Is there a battle of the sexes?

Many from Generation X (born 1966-1980, retiring in the 2040s) have little or no DB pension and insufficient DC. They will have more to do than both earlier generations and those now auto-enrolled. The timing of the DB to DC shift creates a specific generational difference for men, leaving the Generation X man at risk of being squeezed in the middle. A greater share of Generation X men work in the private sector than earlier generations and this has left a greater proportion of their pension income exposed to the shift between systems.

In contrast, we see a gradual but steady build up in private pensions among women. This is partly due to a greater proportion of women working and working for longer. But it is also the rapidly increasing number of women joining and making contributions to pension schemes. There are more women working in the public sector too, meaning some are building up DB pension entitlements.

Auto enrolment has meant 8.7m people (or 80% of eligible employees) are currently contributing to pension schemes. Expectations are we’ll hit 10m this year, but this will be tested by the increase in minimum auto enrolment contributions. This will still be insufficient to hit the Minimum Income Standard - even including the State Pension which is expected to be paid to over 85% of employees at c£8000 a year (in today’s terms).

So, is it good or bad?

The report concludes: “that current and future retirement income adequacy shows that neither pessimism nor complacency is warranted. Policies currently being implemented have prevented deterioration in outcomes across future cohorts of pensioners, but our ambitions for adequacy on an earnings replacement basis appear to remain quite far out of reach”.

I’m encouraged by the findings of the Resolution Foundation report but remain worried about the risk of complacency. I also wonder whether the hike in employee contributions under auto enrolment will go smoothly given the timing coincides with Brexit, which may well add to the pain…



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