We'll live to 100: Can we afford it and what is the role of workplace pensions?
Such improved longevity is a human success story, but it undoubtedly presents challenges. Mercer analysis reveals that the UK faces a pension saving gap of $33trn by 2050, up from $8trn in 2015.
Many of us will choose, or be economically forced, to work longer but we still spend the majority of our extra years in retirement.
In response, governments are placing more responsibility for saving onto individuals and employers, and the workplace is growing in importance as the number one source of pension funding.
Defined contribution (DC) provision is now the dominant retirement savings arrangement accounting for over half of all global pension assets. The individual is clearly front and centre to make best use of these retirement savings arrangements, yet financial understanding is low and savings rates are inadequate.
The World Economic Forum says contributions of 10-15% of annual income are desirable for DC savers yet the Office for National Statistics reports UK savers put away just 4%. This low rate is made worse by the predicted long-term low-growth environment.
A changing workforce
Individuals, companies and societies are at risk unless we change our approach to retirement saving.
Nearly two-fifths of people acknowledge they will have to work beyond their preferred retirement age and there is a growing recognition that the traditional cliff edge approach to finishing work will cease to exist. Instead people will choose to use their extra years to work part-time in the run up to true retirement, with many retraining or taking career breaks during their earlier life.
In response employers are starting to adapt working practices and benefit packages to their changing workforce. In particular there is growing support for financial wellness programmes that consider other financial issues alongside pensions, which can ultimately provide individuals with the financial freedom needed to consider longer-term planning.
Next generation DC
Today's successful DC schemes focus on providing a better outcome for members by striking the right balance between adequate contributions, appropriate investment and risk, and effective communication - an approach Mercer has termed Next Generation DC.
Clearly members have to pay in enough if their pot is to provide for them in retirement, but they also need to invest intelligently and take appropriate risk. Making the right investment choices can have a huge impact on the final pot; a 1% improvement in return per annum can be the equivalent of a 2% increase in annual contributions,we have found.
For members, getting contribution and investment decisions right can be a challenge. In particular, default funds need to evolve recognising that we will be moving into a lower yielding environment to offset the impact on members.
Contributions and investments need to be supported by effective communication and engagement to ensure employees both value their pension benefit and make sure they make best use of their DC provision. In a trial run of a personalised pension videos designed by Mercer, which use employee data to tailor the content to each individual employee, one client reported a viewing rate of 75%, prompting 50% of employees to take further action to increase their pension contributions.
Summary
The world is changing; we are living longer and healthier lives which is great news, but we need to do more to ensure we can afford to do so. Fortunately governments and employers are making progress in improving financial wellness and delivering better outcomes for retirement savers.
However while the momentum is there, we need to build on it. We can work together to design next-generation solutions to help employees better manage their financial lives and enjoy their extra years.
Essentially there are three guiding principles for employers looking to improve their employees' financial health: make savings achievable, interesting and simple.
Stephen Budge is principal, UK DC and financial wellness at Mercer.
This article was supplied by Mercer.