According to the OECD Pensions Outlook 2012 report distributed today, due to poor performance of British pension companies, people retiring in the UK may not have enough funds to maintain their desired lifestyles. Unlike counterparts in most developed countries that have seen the value of their pension savings rise, British pension pots have been shrinking.
One of the key reasons outlined in the report, is the UK pension funds’ higher equity exposure underlined by poor equity market performance and there are also a number of other shortcomings, some of them structural that hold the industry back. A combination of the non-existent culture of saving; an ageing population; and a huge government deficit, to name but a few, means there is a real chance that X and Y generations could experience a much lower quality of life than that enjoyed by baby boomers.
Morten Nilsson, CEO, NOW: Pensions, comments:
“OECD’s findings expose the urgent need for a structural reform of the UK pensions industry. Fundamentally, promoting a savings culture in the UK is of upmost importance. To a large extent, this has been addressed by the Government’s introduction of auto-enrolment, which requires all employers to enrol their workers into a qualifying scheme. It is a progressive idea, as it spreads the responsibility for saving for retirement between employers and employees. While prompting individuals to prepare to contribute significantly more to pension pots in order to maintain the same quality of life, the new law also encourages employers to pick an adequate scheme to manage auto-enrolment, safeguarding interests of all relevant stakeholders.
OECD’s findings also touch on the inappropriate fund structure used by many pension companies in the UK – namely high equity exposure even after 2008 and subsequent falls in the equity markets. It’s imperative to improve the structure of default funds, in which the vast majority of members in DC pension schemes are invested, and also to systematically manage the risk by diversifying investments and remaining agile in the markets.
If successfully implemented, auto-enrolment will change the lives of future pensioners as well as the UK pensions landscape as a whole. The key players in ensuring auto enrolment is a success are the policy makers, the employers who need to focus on selecting the right pension scheme for their employees, and the pension industry which is facing a selection of new challenges including increasing competition, new regulations, difficult markets and a lack of trust.
With this in mind, it is vital to ensure that the first phase of auto-enrolment staged for October 2012 is as smooth as possible, as it is a great start building a stronger savings culture in the UK and ensuring the industry catches up with its counterparts in most developed countries. “