The Ski-Slope of Doom
When former Pensions Minister (and the UK’s longest serving) Sir Steve Webb publishes a report as evocatively entitled as The Ski-Slope of Doom,¹ you tend to sit up and take notice. Even more so, when the report’s central
tenet suggests that we’re almost at the point of peak pensions, after which the state pension will increasingly become the mainstay of most retirement outcomes. This, despite the UK state pension equating to less than 30% of pre-retirement income for the average UK earner,² having been designed to provide no more than a basic standard of living in retirement.
What exactly do the numbers tell us?
The bottom line of this revealing report, which really gets behind the high-level numbers, is one with which most pensions practitioners are all too familiar. Over the next 25 years, in the absence of a dramatic increase
in contribution rates and stellar long-term investment performance, DC simply won’t substitute for the abrupt decline of private sector Defined Benefit (DB) pension rights,3 notwithstanding the undoubted success of
automatic enrolment and the roughly 10.5 million people who have been brought into pension saving since 2012.4 This will be especially true for men who have, to date, been the main beneficiaries of private sector
(although not public sector) DB pensions – at least those of a certain age. Indeed, excepting those men who will be newly retired over the next couple of years and “will probably have the highest incomes of any generation
before or since”, the real income at retirement of newly retired men over the next two decades (who will be largely, if not exclusively, reliant on their DC pension pots and the increasingly central role of the state pension)
looks set to fall by around 20%.5 By contrast women, on average, should fare a little better by virtue of their ever greater participation in the labour force, their take up of auto enrolled pensions and the recent equalisation of State Pension age (SPa).6
By implication, one of the few positives to surface from this seemingly inexorable trend is that the chasm between women’s and men’s pensions should halve by 2040.7 However, this upturn in women’s relative fortunes
is just that, given that women’s real incomes in absolute terms at retirement are likely to do no better than stagnate, rather than decline, over the next 25 years. Indeed, over 80% of women’s retirement income is likely, on average, to derive from the new single-tier state pension8 and the continuation of the generous uplifting of the state pension each year by the triple lock”.9
Finally, in noting the Department of Work and Pensions’ reluctance, at least until the mid-2020s, to widen the automatic enrolment eligibility criteria and raise minimum employee and employer contributions, the report suggests three sensible policy choices, which largely draw on good behavioural science, to arrest this ostensibly imminent decline in retirement living standards. These comprise: increasing the employer – not the employee – minimum contribution, to prevent triggering widespread auto enrolment opt outs; starting employees on higher minimum contributions but allowing them to opt down their contribution rate; and introducing the automatic escalation of contributions for when the employee receives a pay rise. In addition, the report suggests enhancing outcomes by improving members’ value for money, principally through accelerating DC consolidation and encouraging the greater take-up of Collective Defined Contribution Schemes. Combined, the report notes that these measures could yet see the DC cavalry arrive.
Why does all of this matter?
The report perceptively notes, in a plea to policymakers, that “without a greater sense of urgency, a whole generation of people will experience a worsening retirement outlook.”10 Although not explicitly mentioned, this includes many of the nation’s 4.3 million self-employed,11 who increasingly operate in the gig economy, with its meagre pensions uptake12 and, of course, those roughly 10 million employees likewise excluded from automatic enrolment by virtue of their age and/or their salary not meeting the £10K minimum.13 As we observed in Pensions Watch edition 6, even those who do meet the auto enrolment criteria or who participate in other qualifying pension schemes simply do not, on average, save enough to generate a moderate, let alone a comfortable, standard of living in retirement.14 And therein lies the problem.