PLSA AC 2021: Financial hardship worsening pension income adequacy fears

UK savers are facing higher levels of debt and increasing financial responsibilities amid Covid-19, which are placing greater pressure on pension income than in the past, according to Pensions Policy Institute (PPI) head of policy research, Daniela Silcock.

Speaking at the Pensions and Lifetime Savings Association (PLSA) Annual Conference 2021, Silcock warned that the there has been a shift amid the pandemic, with a greater prevalence of people supporting children and grandchildren in light of financial strains.

"[This] means that there are further calls on pension income than there used to be, so it's harder to just funnel all of that income into achieving the standard of living that you might find acceptable," she said.

"We're also seeing higher levels of debt amongst people in the UK, which means that the affordability of saving and a pension might be more of an issue for a lot of people.

“People are renting more so they're less likely to be buying a house, and if they do buy it, it will be at older ages. This tends to mean less disposable income during working life, but also less disposable income during retirement.

“If you're still renting in retirement, you're probably spending quite a large proportion of your income on rent, which will generally lower your standard of living."

This was echoed by Centre for Ageing Better deputy director of evidence, Emily Andrews, who warned that “retirement needs have changed”, which has “huge implications for how we think about adequacy”.

She said: “The pensions landscape is changing and what we know is that still too often people are basing their ideas of retirement on their parents and grandparents experience, even though their own experiences are very different."

On top of this, Silcock warned that "even if you have saved sufficiently to achieve one of those adequacy standards, if it's a DC pension, often, it will be very dependent on the decisions you make of how you access that, whether or not you're actually able to achieve that level of adequacy".

However, Now Pensions director of policy, Adrian Boulding suggested that solutions can also be found in the decumulation phase through "careful choice of retirement income vehicle".

He said: "Decumulation with the CDC could come on stream in 2023 if government keep up with their intended rollout plan for CDC, and because CDC uses lighter reserves and more exciting investments than annuities, it promises significantly higher income levels in retirement - some studies have suggested maybe as much as a third higher income.

"Now, the CDC comes with a price of less guarantee and more volatility. But if your retirement income oscillated between comfortable, would it really matter?

"In years when your CDC is paying you less, you just have to put off replacing the car or the kitchen unit or your fashionable clothes until a better year.

Boulding also considered the potential impact of higher auto enrolment contributions, stating however, that "we have to take account of the fact that there are different times in people's lives when they are able to afford to pay more and when they're not able to afford to pay more".

He continued: "So rather than just having the one statutory level of contribution at 8 per cent which is what we've got at the moment. I think we probably need three; we should have minimal, moderate and comfortable, levels of contribution.

"Ideally, people will come along as a moderate amount for most of their life when they're in a period when they're quite flush, they can pay the comfortable contributions, and when their in a period after they buy a house for instance, they could drop down to the minimum level."

Adding to this, PLSA director of policy and advocacy, Nigel Peaple, said: "Let's not forget, traditionally employers are putting in twice as much as the employee and I know this may not be very popular but it'd be good to get this to 50/50."

In response to concerns around the impact of renting and housing costs, Peaple also acknowledged that "unfortunately, not all the solutions can be found in the pension space".

"We do need all these governments that are saying they want to do something about housing, to actually be successful doing something about housing, whether that's building more houses or adjusting their ways of affecting the price of houses, you do need something," he concluded.

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