An expansion of automatic enrollment, greater consolidation and a focus on participant engagement are just three ways that the U.K. can avoid a retirement “cliff edge” and close the "pension gap" for future generations, according to consultant Mercer.
The firm’s "Road Map for Pensions and Long-term Savings," published on Aug. 28, highlights three main challenges for the U.K. retirement sector: low standards of living for retirees, low productivity of long-term savings, and the need to increase saver engagement.
There is a risk that the U.K.’s £2 trillion ($2.55 trillion) retirement market is “walking towards a cliff edge in terms of” adequacy and other factors, Phil Parkinson, U.K. head of wealth, said at an event to launch the road map. “Here in the U.K., we have this massive pensions market ... but when you consider our global assessment of pension systems ... the U.K. doesn’t score that highly ... across adequacy, sustainability” and other considerations, he said. The Mercer/CFA Institute Global Pension Index 2023 put the U.K. in 13th place out of 47 countries.
Against a backdrop of the new Labour government’s pensions review, launched this month, Mercer’s road map called on the retirement industry to explore the use of AI and for a slew of other changes, including an expansion of automatic enrollment to cover participants from the age of 18, rather than the current age of 22, and to cover the so-called gig economy.
Contribution rates should also be increased to a minimum total of 12%, up from the current 8%, and for steps to be taken to close the retirement gender gap.
Consolidation was also in the cards, with a call to promote the bringing together of multiple defined contribution plans, and for increased oversight in relation to the master trust market.
For the U.K.’s £1.8 trillion defined benefit market, Mercer said it endorsed recent measures to encourage pension funds to share surpluses with sponsors and participants — which it said will enable businesses to allocate resources to generating long-term savings for employees and investing in growth opportunities. However, clear rules need to be in place around the use of surpluses in terms of how much may be withdrawn at any point in time, which the road map said is “similar to the approach that is now in place in a number of jurisdictions across Canada,” with the principle that the higher proportion of growth assets in a portfolio, the higher the buffer needed before withdrawals may be made. “This could include investments in the U.K. economy to provide suitable incentives,” the road map said.
The road map comes as the U.K. government is considering ways to tap retirement assets in different ways to help to “fire up” the local economy.
