The UK’s retirement system has become less secure thanks to UK Chancellor George Osborne’s pension freedoms, according to an influential report that argues the move to abolish compulsory annuities entirely was a mistake.
The UK’s pension system just managed to hold on to its ‘B’ grade with a score of 65.0 out of a possible 100, down from 67.6 in 2014.
A ‘B’ grade system indicates a sound structure, with many good features, but has some areas for improvement.
The UK score is expected to rise again over the next few years as the impact of auto-enrolment (introduced in 2012, which has led to a record number of people enrolled in pension schemes) will become more apparent. However, the report suggests that minimum required contributions alone are unlikely to lead to adequate retirement incomes for many.
Even Australia’s highly regarded pension system, ranked third in the report, could be improved by requiring part of any retirement benefit to be taken as an income stream, rather than a single lump sum, the report finds.
Denmark and the Netherlands are the only two countries with pension systems that could be regarded as “first class.”
The two countries rank first and second in the Melbourne Mercer Global Pension Index, which measures the health of the pension systems in 25 countries to assess whether they will be able to deliver adequate future provision.
Glyn Bradley, Senior Associate in Mercer’s UK Retirement business, said: “The UK’s new pensions freedoms is a welcome once-in-a-lifetime change but it poses difficult challenges in ensuring that tax-privileged saving is used to provide an adequate income in the final years of life, and not exhausted in middle age.
“Annuities might be part of the answer, but they’re not the only way of taking an income instead of a one-off withdrawal. We need to ensure sufficient retirement related products, guidance and incentives exist to avoid people outliving their savings.
“Having a pension is not the same as having an adequate pension. The UK lacks the savings culture of other countries and current minimum auto-enrolment contributions are unlikely to deliver adequate retirement outcomes. We are also an ageing society, with relatively high debt, and our public sector and state pensions are almost entirely unfunded.”
The report shows average years in retirement have risen from 16.6 in 2009 to 18.4 in 2015. Mercer forecasts this will increase to 19.2 by 2035.
Only Australia, Germany, Japan, Singapore and the UK have raised their state pension age to counteract increases in life expectancy.