Workplace pensions: Adequacy is the next challenge but is it just about pensions?

Steve Watson talks about pensions adequacy and the balancing act that employees face when weighing up their whole financial position.

In case you missed it, we ran a webinar with REBA on 1 July, talking about pensions adequacy and the balancing act that employees face when looking at their whole financial position.

As well as affecting employees, pensions adequacy is a massive challenge for employers too as they try to engage all employees while dealing with increased national insurance and national minimum wage costs.

But it’s not just about pensions. For instance, what about younger employees trying to get on the housing ladder?

The UK pension and workplace savings landscape is undergoing rapid and far-reaching change. In more than 30 years in the industry, I’ve never known so much change.

From the Pension Investment Review and the new Value for Money framework to reforms on pension scheme scale, small pots, and the Pensions Schemes Bill–there’s a sense of acceleration.

But the biggest conversation, and arguably the most important one, is about adequacy. Or, more accurately, inadequacy.

Auto-enrolment: a success story, but not the full story

Since its introduction in 2012, auto-enrolment has brought between 11 and 12 million new savers into the pension system. It’s a remarkable policy success by any measure.

However, while more people are saving, the amount being saved is often not enough.

Currently, average total contributions (including both employer and employee) sit at around 8% of salary.

But many industry experts agree this should be closer to 12% or more to achieve a comfortable retirement.

Yet, with employers already stretched by increased National Insurance and National Minimum Wage obligations, and with employees facing their own financial pressures, legislating for increased contributions isn’t straightforward.

The changing shape of retirement

The retirement landscape has fundamentally changed.

Open final salary (defined benefit) pensions – the so-called Rolls-Royce of retirement income – are now rare, at least in the private sector.

Compulsory annuitisation is effectively a thing of the past.

The idea of retirement as a cliff edge, where work ends and retirement begins, is fading.

Today, retirement is more of a transition, often involving part-time work, flexible income strategies, and ongoing financial planning.

Younger workers are balancing student debt, rising housing costs, and increased job mobility.

Against this backdrop, long-term saving for retirement often slips down the list of financial priorities.

Job mobility and the problem of small pots

Job mobility is no longer an anomaly; it’s the norm.

It’s not unreasonable to believe that the average under-35-year-old could have 11 or 12 jobs over their career.

In a system where each job typically results in a new pension pot, this creates a proliferation of small, fragmented savings.

These small pots are not just hard for individuals to manage, they’re inefficient for the system as a whole.

Research we conducted in 2023 shows that 1 in 4 employees have lost track of at least one of their pension pots.

While consolidation solutions like pension dashboards and small pots consolidators will help, they won’t stop the creation of small pots.

For instance, pensions dashboards are a look-and-see only facility and the small pots initiative is only focused on pots up to £1,000, at least for now.

Multiple pots are not necessarily a problem, but unintentional fragmentation adds to the adequacy challenge.

Lifetime ISAs: part of the solution?

For me, the Lifetime ISA should play a bigger role in workplace savings, especially for younger workers.

I said as much in response to a recent government call for evidence on whether the LISA was still fit for purpose.

My key proposals include lifting the age cap (currently set at 40 for new accounts), extending contribution age limits, and better aligning LISA withdrawal rules with pension access.

LISAs can be a powerful tool, especially for those younger employees who prioritise home ownership and early financial independence alongside retirement saving.

Toward a unified workplace savings strategy

The workplace savings system has many strengths – but its weakness is the sole focus for many employers.

While policymakers, providers and employers do need to come together to deal with the pensions adequacy challenge, they also now need to think about other financial challenges that employees face.

We need some out of the box thinking that challenges the status quo.

We need to be controversial.

For instance, why not allow auto enrolment into a Lifetime ISA? For many employees, it could make all the difference.