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Through a glass darkly

Recent research paints a bleak picture of pension saving, with 17 per cent of people having no idea where there retirement income is coming from and many relying on the state for help By Gregor Watt

Given the changes to pensions in the last 10 years, it is not surprising that the public’s attitude to retirement is changing rapidly. But it appears that the extent of the changes has not been fully appreciated and understood by the UK’s population at large. The transition from the traditional basis for retirement income, the state pension supplemented mainly by occupational final-salary pensions, to a system based on defined contribution or personal pension saving has left a large number of people at risk of falling into the gaps that have opened up between the old system and the new one.

The process of preparing for retirement is a long one but it seems that the erosion of the value of the state pension and the closure of defined-benefit schemes has left many savers at risk of not making sufficient provision for their retirement.

The baby boomers who are retiring now and are seen as the golden generation of pensioners, being able to rely on the full benefits of generous final-salary pension schemes. This generation has also seen the value of their property assets increase substantially and many have been able to accumulate personal pensions and savings to supplement their income.

But research from HSBC suggests that the age group immediately below this has not appreciated the decline in income they will see in retirement from a state pension that has eroded in value over the last 20 years and from the closure of DB pension schemes they may previously have been members of.

The latest in HSBC’s Future of Retirement reports shows a change in attitudes towards retirement but one that is not entirely in line with the regulatory changes that have been enacted.

Certain parts of the research back up the general demographic and economic changes that have shaped retirement in the last 20 years.
As ever, increasing life expectancy is at the root. HSBC’s research shows that almost 50 per cent of Brits expect to be worse off than their parents in retirement and this is due to a combination of factors all too well known to the pension industry.

This pessimistic outlook is not confined to the UK, with the US and France experiencing similar concerns among its population.
Conversely, many Asian countries with high savings rates and relatively low life expectancy compared with the West find expectations for financial sufficiency in retirement really very high.

HSBC head of investments, pensions and savings David Wells says the traditional view that things are rosy in wealthy western countries is no longer valid. He says: “A significant shift in retirement wealth, expectations and outlook is taking place around the world, with the traditional East versus West no longer a reality. Unless Westerners take a leaf from the book of their Asian peers and start to become accountable for their own futures, sadly many will find their fears of financial hardship in later life come true.”

UK respondents cited increase life expectancy, the decrease in value of the state pension and decline in occupational pensions as the reasons behind the expected fall in living standards.

The research also showed an understanding of the disadvantage that women find themselves in when trying to save for their retirement, with 18 per cent more women likely to associate the prospect of retirement with financial hardship.

Growing disparity between understanding of the system and a lack of any action by savers

But while many people are aware of some of the changes occurring to pensions, there are still come real gaps in understanding. According to HSBC, only 42 per cent of people have heard of Nest and only 40 per cent of people have drawn up any financial plans for retirement.

This is very apparent from the level of dependency on state retirement benefits when it comes to being able to fund retirement. Table 2 shows that 21 per cent of people expect their biggest source of retirement income to come from the state pension while 17 per cent have no idea where their retirement income will come from.

Wells says: “Britons know they need to plan and save more for their retirement, yet they are not turning this knowledge into action. People need to look around and take a proper stock of what they need to do. They can no longer totally rely on the state or their employer to provide for them. In the 21st Century, it is all about taking individual responsibility.”

Barnett Waddingham consultant Malcolm McLean says the report shows a growing disparity between understanding of the retirement system and a lack of any action on the part of potential savers. He says: “It confirms what we have known for some time, that there is a growing savings gap between what people should be putting aside towards their retirement and what they are actually saving, which in the case of 60 per cent or respondents is nothing at all.

“There are too many people now aware of the need to accept personal responsibility for their future financial wellbeing but who are putting their heads in the sand and deferring thinking about and developing a plan for their retirement.”

And it is not only pension savers who have been slow to react to the changing retirement market. A recent report from Aviva, called Rethinking Retirement in the UK, says providers have also been slow to adjust.

’Britons know they need to plan and save more for their retirement, yet they are not turning this knowledge into action. People need to look around and take a proper stock of what they need to do. They can no longer totally rely on the state or their employer to provide for them’

The report says: “Over the past 20 years, there has been a dramatic change in the demographics of the retirement marketplace, which the industry as a whole has been slow to respond to. The two key changes are that today’s retires are living longer than ever before and the way they have built up their pensions savings is different to previous generations.”

For this reason, Aviva argues that the retirement process needs to be overhauled to ensure that pensioners retiring now get the best value possible from the retirement funds that they have managed to accumulate.

To this end, the company has set out five proposals that would overhaul the process used for purchasing retirement income and ensure that every saver gets the most appropriate and highest level of income that they are entitled to.

Aviva group chief executive Andrew Moss says: “The current retirement framework dates back to the time when the majority of people had a definedbenefit company pension scheme, giving them a security of income which is lacking for today’s retirees. Bluntly, the products and services available to savers as they approach and enter their retirement are failing current pensioners and this will only get worse as greater numbers of people retire each year. The market needs to evolve to meet the needs of the current generation of retirees, who are facing the twin issues of increased longevity and reduced income.”

The scale of the problem of getting pensioners the income they are entitled to is highlighted by some of the figures in the Aviva report. The 385,000 people buying annuities in 2010 bought 426,392 annuities but only 32 per cent bought their annuity from a company other than the one they had been saving with and only 57,982 were enhanced or impaired annuities.

It also backs up HSBC’s estimates on the source of retirement income and the pressure being put on the generation immediately below the baby boomers who are being squeezed financially and are struggling to put aside sufficient savings.

According to Aviva’s research, for 61 per cent of those aged 55 or over, the state pension will be the single-biggest source of retirement income. More than a quarter of those below pensions age have no savings. This generation is also the first to become burdened with the increasing cost of paying for their parents old age.

The report says: “The current generation of newly retired or soon-to-be retired also find themselves part of a new phenomena defined as the sandwich generation. They face pressure to care for their own parents and to help their children either financially or through care of grandchildren, leaving them squashed in the middle.”

Aviva’s five-step plan would see a number of measures introduced that would see pension savers forced to shop around and steered very strongly in the most appropriate direction.

The five steps proposed are:

  • Making it compulsory for all providers to publish their annuity rates
  • Including medical questionnaires in maturity packs to kickstart an automatic underwriting process and boost take up of enhanced annuities
  • Reducing the cost of switching pension providers
  • Streamlining customers’ retirement savings
  • Helping customers find the appropriate level of advice and or guidance to ensure they get the right annuity.

Aviva at retirement director Clive Bolton says: “The current retirement industry is no longer serving customers as well as it could, conceived in an era when people’s pensions were simpler and their life expectancy lower. Wide sweeping social and economic factors are changing the retirement landscape and in response to these trends, the Government is introduction radical changes to the state pension system and retirement rules. However, the retirement industry must play its part in rethinking its offerings, providing timely and easily understandable advice and information. Consumers face a different landscape to their predecessors and we must take practical steps to help maximise their incomes and make the choices that are right for them.”

HSBC also holds out hope that pension reforms already in the pipeline will clear up a lot of the confusion that still surrounds pension saving and will help boost saving.

The report concludes: “Large numbers of Britons are doing nothing about the shortfalls in provision to come although the possible introduction of a universal state pension by the coalition Government should make the state pension easier to understand. This could make it simpler to convince UK households to take steps towards saving for their own retirement.”

’Britons know they need to plan and save more for their retirement, yet they are not turning this knowledge into action. People need to look around and take a proper stock of what they need to do. They can no longer totally rely on the state or their employer to provide for them’

Aviva goals for reforming the retirement process

1: Requiring annuity providers to publish annuity rates to make it easier for customers to make comparisons

UK annuity providers are not currently required to publish the annuity rates they offer to their customers when they reach pension age. Many companies already do so, especially those that are actively marketing their annuity products to new, or ’external’, customers, but there is still a significant minority allowing no comparisons. The publication of annuity rates should be made compulsory, no matter whether the provider is offering annuities to the whole, ’open’ market, or takes a ’closed’ approach by only serving the customers that have saved for a pension with them. Best market rates should also be highlighted to soon-to-be retirees when the annuity they are being offered is 10 per cent less than the best rates available in the market for the same type of product.

2: Inclusion of medical questionnaires in maturity packs

One of the most noticeable changes in the retirement market over the past few years has been the rise in the number of enhanced or impaired life annuities. To boost this, basic medical questions should be included in all pension maturity packs to ensure those who qualify for an enhanced or impaired life annuity are more easily identified by the industry so firms can automatically offer them a tailored annuity.

3: Reducing the costs of switching providers

When the FSA’s retail distribution review is implemented in 2012, the way customers access advice and guidance about their annuity is likely to split into two broad sections, advice and non-advice. Customers need to be clear on what the right advice or guidance model is for them, based both on what they can afford and what level of service they want and are willing to pay for.Non-advised annuity sales should be subject to the same cost transparency rules as advised sales.

4: Streamlining customers’ retirement savings

As switching jobs every few years is now the norm for most, people are increasingly contributing to several private pension schemes during their working lives. Aviva research suggests that one in three workers have five jobs in their lifetime, therefore legislation should be introduced to allow the automatic transfer of small auto-enrolled pension pots, so savings pots follow members when they move jobs.

5: Helping customers choose guidance and advice

It should be as simple as possible for every customer to choose the level of support they need when making financial decisions about their retirement. To bridge the gap between non-advised, direct purchases, and full independent advice, the industry and regulator should press ahead in developing ’simplified advice’. We also suggest a new form of adviser ’badge’ is created and promoted to customers so they know that if they talk to a ’retirement adviser’ they will be able to create a plan that addresses all their financial needs.

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