The challenges of longevity and under saving faced by the UK are far from unique. At last winter’s Davos summit, The World Economic Forum published a report warning of massive unfunded liabilities in economies across the globe, created by ageing populations and variable provision.
That report pointed to ’systemic risk’ to the entire financial system if issues of providing for longer retirements are not addressed.
It is no exaggeration to say that in a world of economic uncertainty, shifting employment patterns and widespread distrust of financial services companies, getting people to save for retirement knows no boundaries. This means that many individuals will experience an income gap between leaving work and their entitlement to the basic state pension. Small wonder then, that HSBC’s 2011 report on global trends, ’The Future of Retirement’, found that 41 per cent of people feel under prepared for retirement.
So with minds all over the world grappling with similar problems to the domestic issues we face, what lessons can we learn from abroad, and how do attitudes to retirement and saving differ in different countries?
The UK is already looking to the Swedish model, with plans to move towards linking the state pension age to increases in life expectancy. The Pensions Bill currently passing through Parliament is already raising the State Pension Age for both men and women to age 66 by 2020, six years earlier than previously proposed, but more radical proposals to put state retirement age in the hands of actuaries are contained in a DWP consultation issued in April.
Higher levels of saving in Asian countries mean that their populations tend to have a more positive view of retirement, seeing rising household incomes today equating to greater financial independence in retirement. In Asia, the extended family is also seen as a means of support in retirement, with one-third intending to live with extended family members during their old age. In the developed world, where governments and employers are seeking to reduce their pension liabilities, individuals are less optimistic. In the UK, many under 50s are concerned that falling household incomes and the loss of DB pensions will leave them worse off in retirement than their parents, according to the HSBC report.
But another key finding was that those who took financial advice and had a financial plan for retirement saving accumulated significantly more pensions and savings than those who failed to take advice.
Individuals with a financial plan were found to have accumulated nearly 245 per cent more in pensions compared to ’non-planners’ and 319 per cent more in non-retirement assets. Those who had a financial plan and took financial advice achieved the best results (418 per cent more assets).
60 per cent of those who did not have a financial plan attributed this to not having enough money, while 15 per cent blamed lack of time. Women were significantly less likely to be planning for retirement – only 44 per cent, compared to 54 per cent of men. Two thirds of women approaching retirement (ages 50-59) were not planning for their financial future at all.
So how will the 12m people in the UK who currently have no pension provision prepare for retirement? Will people be willing to keep working into old age? A third of respondents to the HSBC survey said work would play a role in their retirement planning and 9 per cent expected paid employment to be their main source of retirement income.
But most respondents said they still expected to retire at a similar age to the current pension able age. So semi-retirement is seen as a route to early retirement, not as an extension of their working life. Even in France, where many workers can still retire at age 60, there is little desire to work beyond that retirement age.
Anti-age discrimination laws have been enacted in the UK, but it remains to be seen whether UK employers will embrace older workers, and anecdotal evidence suggests that many employers, apart from retailers, remain loath to hire older workers.
But assuming that working beyond normal retirement age eventually becomes the norm, there will be challenges for employers who will have to communicate with a workforce that might range from age 18 to 80. PWC partner, Marc Hommel, says: “The challenge will be for employers to engage with an increasingly diverse workforce and to maximise the benefits of diversity.”
That involves taking the best thinking from around the world. But not every good idea that succeeds in one country works in another. For example, employee benefit initiatives, such as Save More Tomorrow, whereby workers see their pension contributions increase automatically with pay rises, have failed to take off in the UK in the way they have in the US.
Hommel attributes this to UK employers lacking imagination and following the herd. “Companies have traditionally shied away from anything that smacks of forced cost increases, although I expect we will see more employers embracing this in the future.”
Bruce Rigby, a partner at Mercers believes it is due to employers having failed to get their heads round DC pensions: “UK employers were overly generous with DB, but haven’t yet worked out what they are going to do in the future. There’s been a knee jerk reaction and it may get a lot worse before it gets better. Employers are more reacting against DB than thinking about DC. But I expect it will change eventually.”
He says change will come when the inadequacy of some DC arrangements becomes apparent and more attractive pensions need to be offered in order to attract skilled workers. “This happened in Canada in the 1990s when there was a shortage of skilled mining engineers and some DB schemes were actually re-activated.”
But most young people today will be enrolled into Nest or some form of group personal pension scheme.
Research shows that younger people like to find comfort in the ’wisdom of peers,’ and take guidance from lifestyle peers and age cohorts in the online community. The lively discussions on financial and the uptake of execution-only Sipps bears testament to the role of digital media as a source of research, information and guidance.
The UK is not alone in this phenomenon. Seeking financial advice from websites is most prevalent in Asia, the Middle East and is growing in the US.
Mark Scantlebury, managing partner of communication consultancy, Quietroom, is assisting a major employer on communicating Nest to 22,000 employees due to be auto enrolled this year.
He says: “Engagement with pension savers must be relevant, stimulating and fun. We need to get it out there on social platforms, encouraging people to share it, comment on it and respond to it with their own content. Auto-enrolment is going to produce a sudden interest in pensions, hopefully kick starting the conversation.”
Another source of advice is family and friends, with 46 per cent of global respondents citing this, particularly in Asia (64 per cent in Malaysia) and China (60 per cent). By contrast, family and friends are only consulted by 22 per cent of Brazilians, 37 per cent of Poles and 39 per cent of Brits, according to the HSBC report.
A major challenge will be making access to financial advice and information easy and straightforward for these people. One in six people are put off retirement planning because they do not know how to go about it, and more than one in five of 30 to 39 year olds do not know where to access a good financial adviser.
The HSBC report shows that the most common trigger for individuals to seek financial advice is a wish to achieve a better return on their savings, followed by life events, such as a promotion at work, birth of a child or getting married.
Individuals need to be set clear goals in terms of the size of pension fund they need to aim for. Explaining to people how each £100,000 of pension fund will buy an annuity of around £5,000-£8,000 (depending on age, gender, occupation and state of health) brings home the stark reality of just how much you need to save to secure a reasonable income in retirement.
That said, behavioural finance research shows that individuals need to be presented with financial strategies that are realistic and achievable. Otherwise, people will shy away and do nothing. The old adage ’keep it simple, stupid,’ is as pertinent today as ever.
Today’s workers also want advice meetings to be short, easy to understand and focused on immediate needs, with 41 per cent preferring meetings with their advisers to last no longer than 30 minutes, the report found.
While Australia, New Zealand and the UK have introduced compulsory savings, to varying degrees, this alone does not address the root causes of under saving, namely low awareness of the cost of pensions and the need for engagement in long term financial planning.
Rigby thinks Nest should be made mandatory and with higher contributions. “If you look at Australia, where there are mandatory contributions of 9 per cent, with plans to raise them to 12 per cent, it has completely changed the environment.”
A recent survey of 1,200 small, medium and large employers, carried out by the Institute of Directors, found that 42 per cent of companies expect over 20 per cent of employees to opt-out of Nest.
Scantlebury sees the threat of mass opt outs from Nest as posing a major communications challenge for employers and the Government. But he sees social media as playing a vital role in engaging unsophisticated workers.
“Pensions is one of the few subjects where there are no pub experts. Pub experts could identify themselves [in a workforce], get connected, and have a big impact via social media,” he says.
Much has been written about the facility to encourage certain types of positive behaviour using the ’nudge’ approach. Auto-enrolment clearly works on this basis, but it can also be used to assist in investment decision-making.
Research by Professors Shlomo Benartzi and Richard Thaler in the US shows how consumers fail to make decisions when presented with too much choice, but are willing to make a selection when there are fewer products (or funds) to choose from.
DC providers may see better choices being made if investors are offered a carefully selected range of around 6-12 funds, rather than hundreds of funds.
The Melbourne Mercer Global Pensions Index rated the Dutch pension system the best in the world. A national consensus that it is fair for risk to be shared between employers and workers, and collective agreements whereby employers are required to provide company schemes has resulted in a 90 per cent participation rate.
This means that benefits and contributions can be adjusted in line with changes in investment returns and rises in life expectancy, thereby capping employers’ liabilities.
Paul Kelly, senior international consultant at Towers Watson, says that when the Dutch Government saw the problems with DB, it moved quickly to career average and risk sharing.
He says: “The Netherlands is the best example in Europe of a country with similar problems to the UK. A new national agreement was recently hammered out between Dutch employers and unions which talks about ’soft’ pension promises, rather than ’hard’ ones. These still provide very good levels of pension, while being affordable and sustainable.”
And what about the 4 million self employed in the UK, who are likely to have an accountant, but not necessarily a financial adviser?
Rigby believes that saving for retirement should be viewed in a more holistic way, taking into account an individual’s entire assets, such as property, Isas and other investments. “There is more money in Isas than in DC pensions, so I would like to see it made easier to put Isa money into pensions.”
HMRC legislation currently prevents individuals from shifting investments such as Isas and unit trusts directly into personal pensions. Instead, investors have to sell the asset, put the cash into the pension and then repurchase the same investment inside the pension, because contributions to a pension must be a ’monetary amount.’
Removing these restrictions could encourage ’in specie’ contributions into personal pensions and reinvigorate long-term savings. The Treasury has indicated that policymakers are willing to explore linking pensions and Isas through the ’feeder fund’ model.
But Rigby also advocates a more radical approach, namely by making equity release cheaper and easier to access as a way of releasing income for everyday living and long term care bills. “This would do much to relieve the UK pensions gap,” he says.
