Surprise, surprise this week saw another study concluding that people are living longer, underestimating how much they need to save for retirement and overestimating how much they will have to spend when the time comes. The acronym ‘NSS’ springs to mind although as this is a family publication I’ll refrain from spelling it out.
Today saw the launch of a study by the Institute of Fiscal Studies, which unearthed the revolutionary fact that those approaching retirement (aged 50 to 64) with a defined contribution (DC) scheme are too optimistic about their retirement income. It concluded on average their DC pension pot would have to grow by 77%, or £20,200, to reach their expected income. Meanwhile, women in their 50s are underestimating their life expectancy by about four years, predicting 84 instead of 88, while men are doing so by around two years (stating 83 instead of 85), when compared to national projections of life expectancy. NAPF chief executive Joanne Segars said: “It’s worrying that so many over-50s are sleepwalking into their old age.” The term ‘sleep walking’ is overused when describing this common situation but is apt given the IFS’ findings. With defined benefit schemes dwindling, DC is fast becoming the default occupational provision, especially now auto-enrolment has officially launched. To some extent the industry still needs to wake up to this challenge. The evolving construction of the default fund, the growth of target date funds and the use of multi-asset is evidence of providers rising to this challenge in DC, but the UK pensions market is a tough cookie. Chatting to Barclays Funds and Advisory managing director Shachi Shah earlier this week, we touched upon how the market is so fragmented given the varying scheme sizes and types of provision that UK investors need to take a more “outcome-orientated” approach to make their capital pots work harder. And with increasing longevity, Shah said providers have to take initiative to make long-term savings plans the best they can as the predominant provider of retirement income. Indeed, outgoing Investment Management Association chief executive Richard Saunders reflects on a similar point in his swansong blog (see below) saying retirement saving is set to become a major issue in the coming decades and investment management will be at its heart. This is true, but while it will naturally evolve there is only so much innovation the asset management and provider industry can come up with. Ultimately it is down to individuals to take the initiative to ensure their retirement does not come as a nasty shock, particularly with annuity rates so low at present. A big part of this is getting the savings message across to employees because at the moment, that 77% growth on their pension pot just won’t be happening.
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