RETIREMENT Insufficient funds

Philip Audaer, Lane Clark & Peacock, on the challenge of achieving adequacy in retirement – and the power of negative thinking

In a nutshell: 
  • adequacy in retirement is likely to be a pipe dream for many
  • employers and trustees need to recognise this and decide what they can and want to do
  • segmenting the membership offers opportunities to address this issue sensibly.

Nobody likes to be called inadequate, particularly by someone you work with, but in a recent article ("Delusions of adequacy") my colleague Andy Cheseldine made an interesting point when commenting on the recently published findings of the paper Retirement income adequacy – generation by generation from the Pensions and Lifetime Savings Association (PLSA), which reported that:

  • 1.6 million people are still at high risk of falling short of a minimum income standard in retirement;
  • 13.6 million Are still at risk of not meeting their target replacement rate (67% of a median income of approximately £27,000).

Andy concluded that: "Given the number of factors and sheer complexity of options, together with the potential for negativity, member communication should focus on the additional benefit of saving rather than shortfall."

While this exhortation to avoid negativity is understandable, this is precisely what members of pension schemes need right now. For most, the concept of "shortfall" is unquantifiable, unless someone is relatively close to retirement. For the rest, it is more realistic to focus on what can potentially be achieved now. This is where the power of negative thinking comes in. Once people have figured out how to cope if things go wrong, at least there is a base for more realistic planning.

There have been countless articles, warnings, exhortations, initiatives etc over the years trying to flag this issue (Sandler, Pickering, Turner et al.), but despite this we are still in a situation now where, to quote the PLSA analysis once again:

Under current financial conditions, for an individual to match the c. £8,000 they can expect to receive from the new State Pension, they would need to accumulate a pension pot of around £280,000. However, for someone aged 55–64, the average value of an individual’s total DC savings is currently only £25,000.

As at 12 February 2017, this fund buys a joint life pension for a 65 year old (3% escalation, 50% dependant’s pension and a 5 year guarantee) of just over £730 a year(source: TOMAS).

Ticking time bomb

It is not just the PLSA sending up another flare about pension planning. On a wider scale, The Office for National Statistics reports that household savings ratios were c.3.8% of disposable income in the final quarter of 2015 – under half the amount set aside as recently as 2012. This figure is the lowest since records began more than 50 years ago.

And because all good things come in threes – even negative ones – let me finally quote Anna Bowes (, in the Telegraph in March 2016:

"If people aren’t saving and they are ageing, how are they going to support themselves in their retirement? Things seem to be working because people are still spending – that should be healthy for the economy but at the same time there is this ticking time bomb to come."

According to the Bank of England, as of February 2016, households owed £63.3bn on credit cards and £115.3bn in other loans excluding mortgages. Not much room for pension saving here, it would appear.

So as we enter 2017, we find ourselves in a situation where:

  • Property investment and rental income is now widely regarded as an alternative, genuine and realistic source of retirement income, because it does not appear to go down in value and is easy to understand. And why not, if the Bank of England’s Chief Economist himself thinks pensions are too complicated? It would be a brave (and short-lived) government that decided to introduce capital gains tax on primary residences, given how many people have constructed entire retirement programmes around this asset class. Property currently exerts a vice-like grip on the entire savings consciousness of the nation.
  • Having been auto-enrolled, employees currently seem to think that the minimum contribution will do the trick, and so are happy to spend more on other so-called luxuries. We know that reality is closer to 12–16%, but how many can afford this? We will have a better idea in 2018/19 when the new contribution levels start to bite.
  • "Rip-off pensions" and "pension scams" dominate much of mainstream media output (with some justification but expressed as a generalism far too often).
  • The quality of information and communications on pensions from providers is so constipated with compliance and legal disclaimers that few people ever read through them and fewer still understand them.
  • Against a background of increased economic uncertainty and variable work patterns, some employers simply do not feel the need to get involved. Why should they care about someone who might only work for a few years or, in other cases, continue to subsidise ex-employees in trust-based schemes who no longer work for them?
  • Successive governments have become obsessed with tinkering with the pension framework in the UK at the expense of creating any cohesive and sustainable strategy for the future.
  • Remedial action can only be taken and a progressive guidance programme designed once this reality has been allowed for and addressed.

Encouraging signs

Advice and guidance has been available for many years, but until recently this was largely funded by commission. However, most still agree that face-to-face advice/group presentations remain one of the best methods of improving member engagement. Following the ban on commission in April 2015, this source of workplace financial advice has largely disappeared, which has left a vacuum.

Although the government and the Financial Conduct Authority (FCA) have taken steps to address these issues through the Financial Advice Market Review, development of the pensions dashboard and the recently updated £1,500 allowance to be taken from fund values to pay for advice (although the jury is still out on the merits of restricting this to three £500 tranches), the reality remains that it will still be down to employers, trustees and providers to continue to meet this challenge.

There are encouraging signs. Providers have started to upgrade administration platforms – they are now much more user friendly and contain additional guidance on wider financial issues. The Money Saving Expert website is now one of the most popular in use for people seeking guidance. The Pensions Advisory Service continues its first-class work. Despite this, it will still fall to employers and trustees to spearhead this project. To do this successfully, they must divide and rule. The problem with most pension communication (besides the use of the word pension) is that it is paper based and homogeneous: 25 year olds get the same message and content as a 55 year old, which just does not make sense. So employers and trustees need tools to be able to segment their membership and send different messages and content in bite-sized, relevant chunks.

In a recent exercise for a client which was concerned that members were not taking full advantage of the company’s matching contributions, we created "saving statements" based around the message of saving more now and the additional benefits that could accrue, as opposed to pushing the "shortfall" message. The 25 year old received a two page statement showing the significant potential benefit of adding a modest additional contribution now, confirming their position in the growth phase of the default lifestyle strategy. The statement for the 55 year old ran to six pages, including messages about moving into the decumulation phase, sourcing retained benefits and generating state pension forecasts etc.

In my experience, when you talk to scheme members, most understand and realise that they need to do more. All employers and trustees can do is to try and put members in a position where they can assess if this is feasible. You can only do so much, so do not feel guilty. The task is Sisyphean; optimism is in short supply.

Suggestion box

Once you have tackled your pension communications strategy, here are some suggestions on what else employers and trustees can do, depending on how involved they wish to be.

  • Accept your limitations, because some employees simply do not want to know; I have seen thousands of pounds wasted on "engagement programmes" as a result.
  • Offer debt counselling (which is often embedded within many Employee Assistance Programmes).
  • Find out what appetite there may be among employees for help – a simple web-based survey is an inexpensive way to do this.
  • Introduce "lunch and learn" sessions on topics of interest.
  • Review existing paper-based communications. A potential client told us recently that they were spending £15,000 per quarter posting investment reports to its members: it turned out that only 15% actually read them.
  • Utilise existing resources: most providers are now really keen to engage with members across a broad range of subjects.
  • Interrogate your scheme demographic: assess what the key messages should be, based on age and other variables.


Philip Audaer is a principal in the DC Practice at Lane Clark & Peacock;

Philip Audaer is a principal in the DC practice at Lane Clark & Peacock.