The Retirement Poverty Timebomb
The issue we are working on for employees is, "how do they ensure that they will have sufficient income in retirement to live the life they want to lead and do the things they want to do?".
There is a perfect retirement income deficiency storm brewing which cannot be ignored. The individual parts of the problem puzzle are staring us in the face on a daily basis but it is sometimes hard to see the whole picture from a single piece of the jigsaw. We have listed below some of the puzzle facts that when drawn together demonstrate the income deficiency problem facing many.
FACT: Demographics are changing; people are living longer and this is increasing the welfare bill for the State Old Age Pension. The increased strain on tax receipts has resulted in the Government actively looking to save money by increasing the age at which some retirees can receive the State Old Age Pension.
FACT: The working population as a percentage of the total population of the country is reducing therefore the tax paid by a smaller proportion of workers is having to fund the State Old Age Pension for an increasing number of retirees, which leaves less money in the Treasury coffers to fund other services.
FACT: With an increasing total population and an increasing ageing population, the cost to the tax-payer of funding the National Health Service (NHS) is increasing; which means that there is less money to fund other services such as the State Old Age Pension.
FACT: People are not saving enough to fund their desired standard of living in retirement and the State Old Age Pension is insufficient by itself to meet their needs. The Financial Conduct Authority have recognised this problem but have stated that they can't force people to save in order to fund their personal retirement needs.
FACT: The Financial Conduct Authority now promotes the use of behavioural insight to address poor customer outcomes. Martin Wheatley (FCA Chief Executive) outlined the position in 2013 in a speech titled "Human Face of Regulation" - this can be viewed on the FCA website.
FACT: Research shows that human decision making is influenced by behavioural biases and our brains use mental shortcuts to form judgements and make decisions. When the issue is simple the short cut normally works well but when the issue is complex, long-term or infrequent, the short cut can lead to poor decision making that results in costly financial detriment.
FACT: Poor customer outcomes cost the financial services industry over £1 billion in redress every year.
FACT: People have historically considered that "bricks and mortar" are a good investment for retirement.
With the rising cost of housing and a generation of people trapped in rented accommodation, property as an available asset for income production in retirement is becoming out of reach for many. The 2016 data from the Office for National Statistics shows that tenants in England paid on average 27% of their gross salary to their landlord. In London, tenants spent 49% of their gross salary on rent. The picture varies across the country but those in the South East, the East and the South West paid the highest proportion of their gross salary on rent. Unless there are exceptional circumstances, money spent on rent is not building tenant equity. Whilst property is an attractive investment to many, the rising cost of property is pushing the investment to a point where many people now need to consider an alternative investment strategy otherwise they may find that investing in a single property confines their contagion risk to a single asset.
FACT: The average UK salary is £27,271
FACT: An increasing number of organisations are closing their defined benefit pension schemes and are replacing them with defined contribution schemes /plans, which arguably reduces the liabilities of the organisation but has certainly increased the likelihood of a major income crisis for retirees.
At the Think-Tank we are working with multi-national organisations, politicians and other like-minded people to address the issue. It is obvious that whilst the regulatory desire has been to educate pension savers, it can be argued that consumers are no more savvy today than they were 10 years ago. Retirement planning is a challenge for professionals, so it is unrealistic to expect employees to become engaged with very technical decisions about their retirement.
For individual retirees seeking a specific income requirement, the individual, their adviser and the regulator must change their mind-set and metrics from plan /asset value to income. In practical terms, the focus for retirement planning needs to be on guaranteeing the required level of income in retirement rather than just amassing the biggest pot. A liability driven strategy should be adopted with an investment strategy that has the maximum opportunity of achieving the desired income stream.
Moving from a pot building focus to an income focused strategy requires a completely different type of engagement and communication between plan providers and savers. At the Think-Tank we are working on the behavioural economics of the problem whilst developing the new language required and helping companies develop new decumulation products for people with pension savings.