Consulting actuary firm Barnett Waddingham has warned that the erosion of defined benefit (DB) pension provision in favour of defined contribution (DC) schemes will lead to "massive social and economic problems" in the future
The firm has calculated that an average earner starting their career now can expect to take an annual retirement benefit in a DC scheme over three times smaller than that of an individual retiring now with a career in a generous DB plan behind them.
A 20-year-old in a DC scheme is said to be able to expect an occupational pension of just £6,440 per year after retiring at 60 compared to the £21,070 per year that a 60-year-old retiring now would draw having contributed to a DB scheme since the age of 20. That assumes both have total contributions of 8% of their salary going into their pension pot, which will become a government minimum in 2018, and earn a salary of £31,600.
Malcolm McLean, an influential consultant at Barnett Waddingham, said that "I don't think anyone should be in doubt about the extent of the pensions crisis we are facing with millions of people currently making no financial provision at all for their old age and seemingly having neither the ability or the inclination to do so."
He warned that "this will inevitably create massive social and economic problems for the future – and this will start to creep up on us sooner than you might think, perhaps as early as the latter part of this decade and probably escalating quite rapidly after that."
Such a drastic reduction in pension provision would leave pensioners with little to support themselves in old age and invest in the wider economy. It would also mean there are less savings in pension funds to invest in financial markets – a key feature of the traditional defined benefit pension system which has now been abandoned entirely by FTSE 100 companies in its original final salary-linked form.
McLean warned that success in the upcoming auto-enrolment into occupational pension plans was vital for defusing the ticking retirement crisis.
He said that "everything seems to depend on a successful outcome for auto-enrolment which in turn depends rather unpredictably on the willingness of individuals either through apathy or design to remain enrolled and not opt themselves out."
McLean pointed out that the government has already compromised its original plans for auto-enrolment by extending the phasing in to help small employers who may find the administration and employer contribution costs difficult.
He added that "it remains my view that the Government should develop a Plan B for implementation at the earliest possible stage should auto-enrolment fail to deliver the desired results." Making it compulsory for employees to save into company pension schemes has been suggested as an alternative step to avert the looming retirement saving crisis.
Barnett Waddingham's dire predictions on the value of DC pension plans assume that people will continue to live longer in the future than they do today, and therefore annuities given by insurance companies would be less generous per year of retirement.
It also assumes that stock markets continue to perform badly, with equities returning 3.5% over gilts. Returns over the past ten years have been dire but some in the pension industry are more optimistic on future equity returns, such as Punter Southall Transaction Services.
Getting the message out
Barnett Waddingham's dire warnings come on the day that the Department for Work and Pensions started an £11 million advertising campaign to encourage people to save more in occupational pensions.
The DWP aims to convince Britons of the advantages of a company pension scheme ahead of the first phase of auto-enrolment this October.
The adverts also inform people about the auto-enrolment reforms. Surveys last year suggested that full knowledge of auto-enrolment was very low amongst both employers and employees.
A full-page advert was published in Monday's edition of the Daily Express, and a DWP spokesperson confirmed that the advert would appear in the Sun, the Daily Mirror and the Metro before the end of this week.
The advert features computer generated figures building a pensions pot from lego bricks with the help of figures representing employers and government. It is adorned with the phrase "a workplace pension is a simple step to a better future".
In launching the advertising campaign, Minister for Pensions Steve Webb said: "As we head into the final stretch before millions of people begin to be enrolled into a workplace pension, it is vital that we make sure that individuals and employers know what to expect.
"Automatic enrolment will transform this country, putting an end to the decline in pension saving, and setting millions on course for a more prosperous retirement."
dbillingham@wilmington.co.uk
