Tuesday, April 27, 2021

The Ski-Slope of Doom - Men's pensions set to fall by 20%

A new report by pension specialists LCP argues that on current trends average men's pensions will rise slightly for a couple of years then fall sharply by 20% over 2 decades

The chief reason (my words not LCP) is that employers are simply not paying enough into their workers pensions and this will force many of them to work until they drop. 

Executive Summary (page 3)

"Every year, roughly three quarters of a million people in the UK reach state pension age. Their regular income at this point is made up of a mixture of state pension, salary related Defined Benefit (DB) occupational pensions and income from more modern ‘Defined Contribution’ (DC) or ‘pot of money’ pensions. 

For many decades, the best retirement outcomes have been achieved by those able to supplement their state pension by a substantial salary-related occupational pension. But whilst such pensions remain the norm in the public sector, the number of private sector workers building up such rights has declined steadily and now stands at only around one million. 

Instead, most workers today, including most of those newly ‘automatically enrolled’ into workplace pensions, are building up Defined Contribution pensions which will provide them with a pot of money at retirement. 

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. This paper dispels that myth. 

We argue that past projections of retirement incomes have been distorted by the inclusion of ongoing DB provision for public servants. Whilst this continued provision is indeed good news for those who benefit, for the vast majority of workers, DB pensions are a thing of the past. 

For the first time, this paper strips out the impact of public sector DB pensions and looks purely at what private sector workers can expect to get at retirement. And the story is a bleak one. In essence, private sector DB rights at retirement are currently close to their peak and will decline precipitously in the next 25 years, especially for men. 

By contrast, DC rights will grow only very slowly and will replace only a fraction of the loss in DB rights, leaving new retirees in years to come substantially worse off than their counterparts retiring today. 

We summarise these findings in the chart (Figure 8 in the main report) which we have dubbed ‘the ski slope of doom’. The chart shows the at-retirement income for men and women in each of the next 25 years, measured in current earnings terms. It highlights the fact that women’s incomes will rise only slightly over that period (mainly because of improved state pension provision) but that male pensions will fall substantially, as the death of private sector DB is not matched by the rise of DC saving.

The message of our report is clear. Current plans to replace disappearing DB pensions by new DC savings are wholly inadequate. Without a greater sense of urgency, a whole generation of people will experience a worsening retirement outlook".

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