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As the world of work and the retirement landscape changes, how can we make sure pensions are fit for the future?
We know that the nature of retirement is changing as we’re living longer. The old model worked on the basis that people work full time, stop at retirement age and then start receiving a generous final salary pension. Now people have defined contribution pensions, several employers, multiple pensions and more freedom, choice and responsibility for their financial futures.
When people are asked to think about retirement, there’s often a difference in what people’s expectations of their retirement are, how much they would need to fund that lifestyle, and the actual amount they will have saved for retirement. We call this difference in expectations and savings the pension savings gap. Many people working today face a huge challenge when it comes to planning and saving for their financial security in retirement.
Through our Longer Lives Index data we know that:
We also know that the pension savings gap isn’t the same for everyone. For example, women’s pension incomes are on average 40% less than men’s. This is because of the gender pay gap and the impact of life events on work - such as motherhood, menopause, or caring for elderly relatives. These events don’t just affect women’s finances today, but also impact their ability to save for their retirement.
There are different types of pensions in the UK. Private pensions – which are often set up by your employer or taken out directly by an individual, and the state pension - which is run by the government as a state benefit.
In 2024 we lobbied for a government review of private and state pensions and the new government has committed to making pensions better for people. But we need to see action soon because millions are still not expected to have a comfortable retirement income. With the State Pension Age scheduled to increase to 67 from 2026, this could create even bigger challenges.
One change that is needed now, is for more people to have access to more help and support to make financial decisions about their retirement. Without the right support, poor decisions can lead to people to running out of savings or experiencing a lower standard of living in retirement. Only a small minority of people can afford advice through independent financial advisors. Currently only 8% of UK adults receive the support needed to make financial decisions about their retirement.
Policy changes have given savers flexibility and greater control of their pension pots, but this has also given them a range of complex options to evaluate. The means that while many people have switched off while saving for their pension, they are faced with complex, life-changing financial decisions as they approach and enter retirement.
We have identified five areas that could help to close the pension savings gap and ensure pensions are suitable for the changing nature of work and retirement.
1. Increase auto-enrolment contributions
Incrementally increasing the default auto-enrolment contributions from 8% to 12% could help to close the pension savings gap. We’ve created a framework that outlines how an increase could be implemented, as well as understanding the costs to individuals and the economy if this is delayed.
2. Saving efficiently: engagement and support
We need to protect lower earners by improving the flexibility of auto-enrolment, including requiring employers to continue their contribution if an employee opts out. There is also a need to introduce new products to allow employees to have emergency access to some contributions if needed.
3. Launch pensions dashboards and widen access to information and guidance
Nationwide pensions dashboards would help people to track their pensions and easily access advice and guidance about their pensions. Reforming the current advice and guidance offered to customers would also help people to spend and save wisely.
4. Bridging the gap to state pension age
As more people remain in the workforce, inclusive employment is a priority. By improving access to flexible working, more people can choose to work in a way that works for them, alongside other life commitments like caring, or around life events like menopause or ill-health. Also proving universal career advice for all ages would help people to make informed decisions about the work they want to do and the future of their career.
5. A comprehensive safety net: state intervention
The government should look to use a single definition of adequacy across pensions and benefit policies, especially in defining ‘undersavers’ and the protection they need. Any changes to the state pension should involve public engagement to that it is fair, adequate and sustainable.
Phoenix Group is the brand name of Phoenix Group Holdings plc, its subsidiary companies and brands.
