Asset-backed pension systems are failing to be inclusive to the needs of all types of individuals and workers, according to a joint report from Standard Life and OECD.
The report, Diversity, equity and inclusion in asset-backed pensions, highlights differences between pension uptake among diverse populations in the UK, with significantly less Black and Asian people have a private pension, preferring property.
As part of the OECD research, Standard Life’s 2021 Retirement Voice Study – an independent online survey of nearly 5,000 individuals in the UK – found a pronounced difference in private pension uptake between diverse populations in the UK, with just 37 per cent of Asian people and 36 per cent of Black people saving into private schemes, compared to 56 per cent of White people.
The report says eligibility criteria, personal attitudes, views and behaviours affect individuals’ willingness to join voluntary arrangements.
It says differences in financial literacy levels between men and women also partially explains lower participation rates among women, although income levels and career breaks for children play a key role in this. The report contrasts the UK’s lower participation rate for women with that of Germany where more females save in pensions, partly because of their higher take-up of public sector roles, but also because the government pays subsidies into voluntary Riester plans for members having children.
Income is also a key factor, with just 6 per cent of those in UK households with income of less than £200 a week participating in a pension scheme, rising to 60 per cent for those earning £1,200 a week.
The report finds that in the UK, women, younger generations (Gen Zers and Millennials), non-White ethnic groups, non-native English speakers, Muslims, adherents of Indian religions (Hindu, Buddhist or Sikh), low-income earners, manual workers, part-time workers and the self-employed are less likely than other groups of individuals to hold a private pension plan.
The research finds that Gen Zers seem over confidence about the level of retirement savings, while people of Asian ethnicity are more savings oriented than people of White ethnicity, but use other savings vehicles than pensions, such as property and gold, as is the case in the US.
The report found a stronger sense of responsibility for helping parents or in-laws financially among Gen Zers and minority ethnic groups.
Standard Life, part of Phoenix Group, has funded a three-year Joint Research Initiative with the Organisation for Economic Co-operation and Development (OECD) to examine the attitudes and views towards saving and retirement of under-served populations, and to examine the challenges in achieving financial security in retirement. The first report – Diversity, equity and inclusion in asset-backed pensions – explores the factors that may influence the ability and willingness to save for retirement among diverse populations in order to build more inclusive asset-backed pension systems.
It highlights that the self-employed tend to participate less than employees do in asset-backed pension plans. In the UK three-quarters (74 per cent) of employees participate in a pension scheme compared to just 16 per cent of self-employed workers.
It found low-income earners are less sensitive to tax incentives because they may lack sufficient resources to afford contributions, they may not have enough tax liability to enjoy tax reliefs fully, and they are more likely to have a lower level of understanding of tax-related issues. Non-tax financial incentives, such as subsidies and matching contributions paid directly in the account of eligible individuals, are therefore better tools to encourage retirement savings among low-income earners.
Sangita Chawla, chief marketing officer, Standard Life, says: “Better understanding the views, attitudes, and expectations of diverse populations towards saving and retirement is vitally important if we are to further improve the design of asset-backed pension systems to better account for their different needs. While it may not be possible to design pension plans that adjust to the situation of every single sub-group of the population, having a greater awareness of the differences across socio-economic characteristics means that selected design features can be improved to reflect a wider array of preferences.
“Our research with the OECD highlights that pension systems could be more inclusive to serve a wider range of people, who increasingly are responsible for their own pension arrangements. Those with limited or no access to workplace pensions are in danger of being left behind. By shining a light on the issue and better understanding the challenges faced by diverse populations we can begin to build more inclusive pensions for all.”
Standard Life’s 2021 data shows that confidence in making financial decisions varied across socio-economic characteristics, with the OECD concluding ethnicity to be a significant factor. While confidence increases with age, income levels and work status, Asian and Black ethnic groups are more likely to feel confident compared to people of White ethnicity. In terms of gender, women were seen to feel less confident than men in financial decision making.
With both Asian and Black people demonstrating greater engagement with their future finances, – 67 per cent and 65 per cent respectively saying they prefer to save as much as they can now for a comfortable retirement later – and also declaring that they had done more dedicated planning for retirement – the research finds that when considering how to take money from pension savings, it’s younger generations, women, low earners, manual workers, people in junior positions and part-time workers within White populations that feel less confident than those other groups of individuals.
Pablo Antolin, principal economist at the Private Pension Unit of the OECD says: “It is important to consider individuals’ views, attitudes and expectations towards saving and retirement, as these can affect participation in asset-backed pension arrangements and can vary significantly across socio-economic characteristics. The analysis of Standard Life’s Retirement Voice 2021 data shows that income, employment status, age, gender and ethnicity may influence how people in the UK perceive saving and risk taking, their level of confidence in making financial decisions, what they consider as positive or negative aspects of retirement, what financial commitments they expect to have in retirement, their attitudes towards planning for retirement and the sources of guidance they are more likely to use. Understanding such differences can shed light on how the design of asset-backed pension arrangements could improve to target under-covered populations and ensure that their preferences are taken into consideration.”
Standard Life and the OECD have outlined a number of key considerations to make asset-backed pension systems more inclusive including:
- Better understanding of the differences across socio-economic characteristics means that selected design features can be improved to reflect a wider array of preferences
- Targeted communication could help define a retirement income objective and check whether individuals are on track to achieve it, and pensions dashboards could be helpful here
- Identifying individuals who lack confidence in making financial decisions can help targeting financial literacy programmes
- Identify which groups of individuals may lag behind in terms of retirement planning and what sources of guidance may work best for different people