The UK’s retirement savings deficit has been estimated at £9 trillion, as longevity continues to increase while savings levels remain too low.

A new report from the Chartered Insurance Institute (CII), An age-old problem – developing solutions for funding, seeks to paint a comprehensive picture of the retirement savings landscape, and provide an insight into the savings required to fund retirement once costs associated with long-term care and debt are taken into consideration.

The report models two core scenarios. The first assumed that pensioners retiring over the next forty years achieve the current average retirement income, all have debts to pay down and one in four need long-term care. In this situation, the total UK retirement savings gap is £9 trillion.

In the second scenario, researchers assumed that pensioners retiring over the next forty years achieved 50% of their pre-retirement income and carried no debts into retirement. One in four retirees were assumed to require long-term care. In this situation the total UK savings gap was still £4.4 trillion.

Director of policy and public affairs at the CII, David Thomson, said it is clear that the scale of the problem is “massive”, though not insurmountable.

The report identifies three issues at the core of the problem. First, it argues the Government must clearly explain to the public that the state will not, and cannot, pick up the bill for the entire savings shortfall.

The financial services sector is also called upon to “shoulder its responsibility”, and embrace the legislative reforms aimed at improving the standards of and confidence in financial products and providers.

“Finally, there has to be more cross-party collaboration to provide the public with certainty around future rules. More must be done by both the government and opposition not only to provide solutions but to engage with a sceptical public to build understanding and acceptance of the action required,” Thomson said.

A range of experts’ views are also included in the report, from Pensions Minister Steve Webb, NEST Corporation chair Lawrence Churchill, chief executive of The Pensions Regulator Bill Galvin, Dr Ros Altmann of the Saga Group, and others.

In his contribution, Webb said that the challenges faced in pensions are “more stark today than ever”.

The Minister said that restoring the earnings link, introducing the triple guarantee, and measures in the Pensions Bill such as state pension age increases will contribute to better outcomes from pensions.

Further, it is hoped the measures outlined in the recent Green Paper on state pension reform will bring about improvements.

“Our proposed reforms will end inequalities in the current system that penalises women, low earners and the self-employed. People will have clarity and certainty about what they will get from the state and see what other savings they might need. And they will know they will be better off in retirement if they save. We want to ensure people have the opportunity to save.

“With a streamlined, flat-rate pension uprated by our triple guarantee, and millions more people saving for their retirement, we can make sure, at last, that we have a pension system fit for the twenty-first century,” Webb said.

Dr Altmann said the Government and the financial industry have crucial roles to play in overcoming the obstacles to better retirement outcomes.

High levels of private debt, a lack of strong incentives to encourage saving, and high property prices were identified as among the barriers to saving.

Dr Altmann called for an “image makeover” for pensions, to make people more positive towards the idea of saving in the vehicles. Further, the Saga director supported a radical redesign of state pensions, and for the industry to design more flexible products which would provide for long-term savings but also allow people early access to their money should they desperately need it.

“In conclusion, there is an urgent need to rethink pensions and both Government and the financial industry have crucial roles to play in helping individuals prepare for a better retirement. Pensions alone, however, will not solve all the problems faced by our ageing population and it will be essential to help people plan to work longer – preferably part-time for a number of years – as well.”

The full report can be accessed on the CII’s website here. (pdf)

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