UK retirement system improving; gender pensions gap remains a global concern

The UK has seen a “considerable increase” in its overall score in the annual Mercer CFA Institute Global Pension Index, jumping from 15th to ninth position in the global rankings, although the gender pensions gap remains a global concern.

The UK saw its overall score increase from 64.9 in 2020 to 71.6 in 2021, with this attributed to a strong improvement in the adequacy sub-index value, which increased from 59.2 in 2020 to 73.9 this year, primarily due to the impact of auto-enrolment.

However, the analysis also found that there “remains room for improvement” on key areas such as pensions adequacy for lower paid workers and the gender pensions gap, which stood at 40.5 per cent in the UK.

Indeed, the gender pensions gap was found to be “inherent in every system”, although the analysis found that there was no single cause of the gender pension gap, despite all regions having “significant differences” in the level of retirement income across genders.

The UK and Denmark, for instance, were found to have similar employment rates for men and women, but "quite different" gender pension gaps.

The findings have raised concerns about pension design and socio-economic inequality, as the study found that whilst employment issues are "well known" major contributors, pension design flaws are “aggravating the issue”.

This included non-mandatory accrual of pension benefits during parental leave, absence of pension credits while caring for young children or elderly parents in most systems, and the lack of indexation of pensions during retirement, which have a larger impact on women due to longer life expectancy.

Commenting on the results, Mercer partner and trustee leader, Tess Page, said: “The UK pensions system is in a much improved position from last year. We have benefitted from auto-enrolment pushing up savings rates, as well as mostly helpful policy and regulatory changes.

“However, many members still face a cliff edge at retirement and, as ‘generation DC’ approaches pensions age, this issue is only expected to accelerate. There are a number of actions that employers, trustees, and the government could take to help improve the UK system and deliver better long-term retirement outcomes.

“A great start would be further increasing auto-enrolment contributions and coverage – notably to better serve those who are self-employed.”

Adding to this, CFA Institute Head of Advocacy EMEA, Olivier Fines, noted that whilst the UK government aimed to introduce more flexibility in 2015 to allow the system to better cater to people’s needs, it also “upped the ante” for individuals to take responsibility for their own long-term savings needs.

“This is where the financial sector has a role to play. Members should expect that the advice they obtain from professionals on such crucial decisions which affect their livelihoods be guided by fiduciary duty and suitability,” he said.

“In 2019, membership of occupational defined contribution schemes in the UK for the first time exceeded that of traditional defined benefit schemes.

"A tool like the Mercer CFA Institute Global Pension Index can help the industry and policy makers better appreciate the structural and long-term impacts of policy decisions and provide meaningful context for this crucial debate.”

Elsewhere in Europe, Iceland, a newcomer to the index, was crowned the world's best retirement system with a score of 84.2, while Netherlands and Denmark took second and third place with scores of 83.5 and 82 respectively.

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