Retirement saving has become a major policy issue around the world, but the key policy questions are somewhat different in the UK than elsewhere. Raw projections of the cost of the UK state pension system as the population ages appear affordable as a result of previous pension reforms that have cut pension benefits for future pensioners. The changes to the State Earnings-Related Pension Scheme as a result of legislation passed in 1986 and 1995, coupled with the formal indexation of state pension payments to growth in prices rather than the greater of growth in prices or earnings (since the early 1980s), and the planned increase in the female state pension age from 60 to 65, have substantially reduced the projected future cost of the system.
But as a result of these reforms the amount that many individuals can expect to receive from the state when they reach retirement will be low, especially since any additional state spending there has been targeted to those on the lowest incomes through more generous means-testing. By 2054 state transfer payments to pensioners are projected to be two-thirds the proportion of national income they were in 2004.
...those with low pension wealth tend to have lower levels of other assets as well.
Private retirement saving is therefore going to take on an increasingly important role in ensuring adequate income in retirement. Policy debate thus has a different focus to most other European countries, focusing on (a) the degree to which it is possible, and appropriate, to target (reduced) state pension spending on those who need it most and (b) the ways in which the government can facilitate greater private pension saving by the rest of the population.
A recent IFS study1 looks at the pensions and retirement savings for those approaching retirement in the near future. Using detailed data2 on pension arrangements we were able to estimate pension wealth (and therefore future pension incomes) in order to add them to the measures of financial, housing and other wealth that are also collected. The distribution of retirement wealth is found to be very unequal although the inequality is different for the various components, with state pension wealth being relatively equally distributed across the population, as would be expected given the nature of the pension system in the UK. More importantly, perhaps, the various forms of wealth do not offset each other - those with low pension wealth tend to have lower levels of other assets as well.
So will these resources be 'adequate' for this soon to be retiring cohort? Defining what is meant by 'adequate' is not straightforward but there is a group of the population approaching retirement who do appear likely to have retirement resources that will fall below commonly used benchmarks of adequacy as they retire over the next ten to 15 years.
The figure below shows how retirement income is predicted to vary across the population of future retirees (more specifically those reaching State Pension Age between now and 2017), under different assumptions about the wealth components that they may choose to use to provide their retirement income. Taking a level of £10,000 per year, pension incomes alone would bring around half the group to this level of income. If individuals chose to annuitise their other wealth and their housing wealth (at appropriately chosen rates) a further 20 per cent of individuals would be brought up to this level of income.
Indeed, adding in all forms of other wealth, including Pension Credit, we see that almost 30 per cent remain below this target and would need to increase their pension contributions or save more between now and their retirement. As the data2 show, this 30 per cent contains a large proportion of those with low labour market attachment, with minimal formal qualifications and who are in receipt of incapacity benefit. A group that has seen its opportunities in work decline and a group that is notoriously difficult to move back into employment.
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