Around 1.6 million people have joined workplace pension schemes and by the time all companies – from the multi-nationals to one-man (or woman) bands – have joined, around 11 million more people could be saving for retirement.
This is definitely a welcome first step but that is all it is. There is much more to do. The truth is that current UK pension thinking is out of date and not fit for the future, as retirement prospects are more uncertain than ever.
Although future state pensions are being cut and generous employer schemes are closing, most auto-enrolment pension schemes will not provide guaranteed pension incomes. The future pensions are at the mercy of markets and annuity rates which mean a significant risk of inadequate retirement incomes.
Previously most employer pension schemes offered defined benefit or final salary pensions – in which you knew how much pension you would receive if you saved into one. Now nearly all private sector employers are offering much less generous defined contribution pension schemes, where all you know is how much you and your employer have contributed, but you cannot predict how much pension it will provide. This leaves workers facing far more risks than ever before.
That is why I have written a report Pensions: Time for Change in association with retirement investment group MetLife which calls for new thinking and increased flexibility in retirement planning.
Individual workers will have to cope with the risks of pensions and yet research for the report shows 60 per cent of pension savers do not understand or do not know whether they understand the risks they face in the schemes they will join under auto-enrolment. Financial advisers believe just a third of their clients will achieve the retirement income they need.
The current pension saving system is designed for retirement as it used to be and not for 21st century lives. Most pension products have investment strategies that assume people will buy an annuity at a pre-determined retirement date.
For example, many schemes offer “lifestyle” or “target date” funds which move people into supposedly less risky investments as they approach a pre-set retirement date and are expected to buy an annuity, but as people’s lifestyles change, they will neither be retiring at a pre-set date, nor will they be buying an annuity.
The “one-size fits all” approach, which the standard pension “default” funds offer, does not fit any more as many people will not buy an annuity and do not retire at so-called normal pension ages. The lifestyle funds do not fit with modern lifestyles and the target date funds are targeting the wrong dates.
Furthermore, the supposedly less risky investments such as Government bonds, which are relied on in the run-up to retirement, have fallen by ten per cent or more in the last year. Standard concepts of investment risk may no longer apply making investment increasingly uncertain following the unprecedented monetary policies that have distorted Government bond markets.
There is a new retirement reality which the pensions industry just has not woken up to. More than a million over-65s already work and as life expectancy and health improve even more will continue working longer.
Research for the report among people aged between 50 and 60 shows around 54 per cent do not believe they will be old until they reach their 70s, with 28 per cent not expecting to feel old before their 80s. Only one in four plan to fully retire straight away, half want to work past 65 and around two-fifths plan to stage their retirement and work part-time for a while.
They are not working on just for the money, but many want to work to keep in touch with colleagues, or to feel useful and respected. A third of those who returned to work part-time after retirement said they did so for personal pleasure and fulfilment. Retirement is becoming a process rather than an event.
The pensions industry needs to develop new approaches for the new retirement reality. As retirement becomes more of a journe than a destination, people need to make a financial plan and regularly monitor whether they are on the right track. Pension planning is not a one-off exercise but an ongoing process, checking to see if you are going in the right direction and making adjustments, rather than just putting money into one fund and leaving it for decades. It is also possible to buy insurance to guarantee your pension. Retirement is changing and it’s about time pensions did too.
• Dr Ros Altmann is a national pensions expert and author of a new report entitled Pensions: Time for Change.