For many people in Generation X, those born between 1962 and 1982, retirement planning seems like a mountain to climb, with the summit receding from view rather too quickly.
The statistics are not pretty. s little as 20 per cent of defined-benefit schemes still remain open to new members today, according to the NAPF.
In the eight years until 2008, the number of employees in employer-backed DB schemes fell from 28.6 per cent to 13.5 per cent. If the existing rate of decline continues, there will be no private sector final salary scheme members in eight years time.
Many employers are converting their gilt-edged occupational DB schemes to defined-contribution schemes to reduce their financial exposure. Others are investigating whether their existing schemes qualify for transfer into auto-enrolment from October 1, 2012 to reduce their exposure even further.
However, the burgeoning domination of money-purchase- based DC schemes brings with it the spectre of falling employer contributions. The reality is that employer contributions to DC schemes are less than half that made to DB scheme members. On average, employers pay 14.9 per cent of salaries to open DB schemes but just 6.4 per cent to their DC schemes.
Employees are also paying in less to open DC schemes – just 3 per cent compared with the 5.4 per cent they pay to open DB schemes. The reality is that the vast majority of us now in private schemes are currently contributing less and less into them, either personally or via an employer contribution. Only 3.3 million people paid into their personal pensions in 2010, down 300,000 on the previous year.
The bottom line is that Generation X is definitely in a weaker position as regards retirement planning than they were a few years ago.
Part of the problem is that saving for a pension is seen as dull. We live for the day and damn what happens in the years to come – we have given up trying to prepare for our years of blissful retirement.
So how are we going to persuade a generation, some of whom may be is as little as 17 years away from statutory retirement – to make more significant contributions to their pensions?
One idea is to use the social media revolution. Information people are prepared to volunteer in the course of joining and participating in various social media communities such as Facebook could be pooled anonymously, so that participants can gain a snapshot of where their peers are in terms of pension contributions and what their own shortfall is. Armed with this information, Generation X will be spurred on to take action to reduce any deficit they find.
If this type of platform is to work, it must make it easy for Generation X to check their retirement “status” as they do on LinkedIn or Facebook today. In the same way as you might hanker after your neighbour’s new Audi TT, in the future, you are just as likely to be measuring success by whether you will be keeping up with the Joneses in terms of your retirement plans. Look out for this type of offering coming out of Silicon Valley sometime soon.
But if this seems a little too far-fetched, a more level-headed approach is to break down the task of retirement planning into bite-sized chunks. The retirement planning market should segment itself into different phases of retirement, which could be as follows:
The transition from full-time work to part-time work. In the good old days, people worked for an employer until retirement, whereupon they would live for the rest of their days on two-thirds of their final salary. Those days have gone. If we are running a bigger business, from age 50, we mightelect to step down to a non-executive position, occupying a maximum of three to four days a week.
Others might choose to sell their business and go freelance, becoming a contractor and taking interesting work as it comes. During this period, vesting might begin – the initial tax-free lump sum might be taken from a pension but simultaneously you are likely to be focused on optimising investments for later in retirement. It will be important to be exposed to assets that will deliver strong returns in the next 10 years.
Looking at the ages between age 60 and 65, this will mark a clear switch from the “working week” being dominated by work to working part-time but with a focus on funding increased leisure time. At this stage, income drawdown is likely to be part of the picture for many midretirees. Other assets may need to be realised to fund this leisure time.
This could be as much as 15 years after the early retirement phase starts, from age 65 to age 75. You might be at statutory pension age, which is currently set to be 66 by 2014. This phase needs even more careful preparation to ensure that, as your potential to earn through work falls, your leisure time is not limited by lack of funds.
This is the stage Generation X fear the most because they see no real prospect of saving effectively for it. However, if they can be supported by specialist advisers who are well connected with providers focused on this segment of the market, it becomes easier to plan effectively for this vital period.
This starts from the moment the retiree is not working at all. Retirement planning solutions need to be delivering peak income from the age of 75. It is also likely to be the time when inheritance planning is done and the retiree needs to look to provide a windfall for the next generation.
Ideally, retirees can put aside funds to support LTC plans or simply fund necessary assistance to avoid being a significant burden on the next generation at a time when too may be facing financial burdens as they begin building their own families.
For this segmentation to really work, the retirement industry will need to get behind it. Products will need to be designed specifically to meet these different phases and IFAs will need to ensure their clients are educated about what they need to focus on at different stages. Portfolio planning and rebalancing tools will need to be designed to underpin that financial advice.
Now is the time to stop seeing retirement as a single event but instead as a series of phases which demand separate consideration.
Chris Read Charirman Dunstan Thomas