Pensions adequacy: why reform alone won’t close the gap
The UK’s Pension Schemes Bill signals a clear intent to create a more efficient, better-performing pensions landscape, while the re-established Pensions Commission will once again examine whether the system is delivering for future retirees.
Together, this suggests change in workplace pensions is not only likely, but inevitable.
For employers though, the more immediate question is: will any of this actually improve outcomes for employees? Because while structural reform matters, adequacy remains at the core, a behavioural challenge - and that bit still feels like it’s being missed.
The adequacy problem is well understood
Auto-enrolment has driven take-up to record levels, and workplace pensions are now a standard part of employee benefits, but participation is not the same as adequacy.
Minimum contribution levels remain low, with typical client averages around 5% employer and 5% employee contributions of pay. For many employees, this simply won’t deliver a retirement income that meets even moderate living standards. At the same time, wider economic pressures continue to limit the ability to save.
Younger employees are juggling housing costs and student debt, often with little confidence that the state pension will look the same when they get there. Women still experience career breaks, the self-employed remain largely outside the system, dealing with inconsistent income and no employer contribution.
Then add in longer life expectancy, longer retirements and the likelihood that the value of inherited pension pots may be reduced due to changes in inheritance tax rules - and the adequacy problem becomes even more pronounced.
In simple terms: more people are saving, but nowhere near enough.
Efficiency does not guarantee outcomes
The Pension Schemes Bill focuses on efficiency, scale and investment performance. Bigger schemes, consolidation and stronger governance should, in theory, improve returns. All good.
But better efficiency alone won’t fix adequacy if contribution levels don’t change.
We’ve seen it all before! For the last 20-30 years, pension providers have invested heavily in tools, comms and platforms - yet behaviour (i.e. people saving more) hasn’t really moved.
The assumption seems to be that a better system will automatically lead to better outcomes. It won’t.
Employees first need to understand their position and, more importantly, care about it. They need to be emotionally invested in their retirement outcome - otherwise nothing changes.
Rethinking default behaviours
One area that continues to concern us is pre-retirement investment strategy.
Traditional glidepaths often start de-risking from around age 50. On paper, that reduces volatility. In reality, it also means people are moved out of growth assets at the point their pension pot is at its largest and potentially miss out on significant upside.
In the private wealth side of our business, we would very rarely recommend that. A shorter glidepath, maybe five years out, is far more typical - balancing risk while preserving growth.
So, the question is: are default strategies designed for the best member outcomes or for governance comfort?
Alternatives should be made available, but they must come with proper education.
The missing link is motivation
A lot of the current policy focus is on “targeted support” the halfway house between guidance and advice. Well intentioned, but likely to struggle.
Like many financial services innovations before it, it assumes people are already motivated and just need help working out how much to save. In reality, most aren’t there yet.
Financial decisions, especially pensions, are emotional before they are technical.
What’s missing is what we call “the gap”.
Before employees act, they need to:
- Be fully invested in their retirement outcome
- Clearly & credibly understand where they are now
- See the gap between now and where they need to be
Only then does the motivation kick in.
Without that, targeted support, like many tools before it, will struggle to create any meaningful behavioural change.
From adequacy to ownership
This leaves employers in a difficult position.
Contribution levels probably need to increase. But right now, many employers simply can’t afford to raise contributions. So, responsibility shifts to individuals.
The good news is, people can make good decisions, but only when they have clarity and context.
This means moving away from product-led communication and towards outcome-led engagement. If you get that right, behaviour does change most of the time.
A system evolving, but not complete
The Pension Schemes Bill and the renewed Pensions Commission are positive steps. They address structure, efficiency and sustainability. But adequacy won’t be solved by policy alone.
It will come down to whether employees actually engage, whether default strategies genuinely support outcomes, and whether we finally accept that behaviour, not structure, drives good outcomes.
Until that’s sorted out, the adequacy gap will remain.
Supplied by REBA Associate Member, Secondsight
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