PTL, an independent trustee and governance services provider, says that most DC adequacy models are overlooking some major factors, meaning that many more members than previously thought are heading toward retirement with inadequate savings.
Richard Butcher, MD of PTL, says: “DC adequacy models make assumptions about all sorts of things, including certain lifestyle and social factors, the problem is that many of those assumptions are out of date. As a result, we are over-estimating the levels of adequacy those members will achieve. Unless we fix the models, we’ll have many more unhappy members and, far more importantly, more members living below the standards of living to which they aspire. Perhaps even in poverty. Beyond the human tragedy, this could cause significant damage to the brand of pension saving which has already suffered reputational issues over the years.
PTL has identified the following factors that are being overlooked:
• The decline of home ownership, meaning more people will be paying rent through retirement. All the current models assume no housing costs.
The tilting of the inheritance scale: families in the middle of the wealth distribution will inherit less because their parents are having to pay for long-term care
- Educational debt: the myth of the graduate premium, in the case of some degrees, imposes a significant break on the ability of those affected to save for their futures.
- Long-term health costs. Successive governments have ducked this issue, meaning that pension savings will become the de facto funder.
“Financial fragility: this isn’t a new problem, but it is a persistent one,” says Butcher. “Unless we fix it, members are likely to opt out, even in response to what many of us would consider a relatively minor financial event.
“While it’s tempting to think employers or the Government will step in, at the moment this looks unlikely. The impact of Brexit and Covid on some employers has made it impossible for blanket increases in contributions, and the Government will need to focus what few resources it has left on growth generation.
“On the positive side, the pension system is becoming progressively more efficient which means incremental gains can offset the impact of these factors. Auto Enrolment also helps, although the contribution rate remains too low for it, alone, to fix the problems. What would make a material difference is an increase in contributions. We need to aim for around 12 per cent of all earnings.”