United Kingdom

Pension schemes unsustainable due to ageing workforce

December 2014

 

Pension schemes could soon become unsustainable due to an ageing workforce, a difficult economy and a lack of public confidence in private pensions, a report by the Organisation for Economic Co-operation and Development (OECD) has found.

According to the OECD’s 2014 Pensions Outlook report, workplace pensions are facing several challenges which are creating solvency issues for defined benefit (DB) schemes in addition to putting defined contribution (DC) schemes into question. In particular, the report warned of a potential pension provision shortfall of more than 10 per cent of pension and annuity liabilities if life expectancy improvements were not taken into account.

The warnings have encouraged policy makers to speed up the government’s pension reforms to ensure that current and new schemes are more sustainable and current challenges are adequately addressed.

Ryan Taylor, Senior DC Investment Consultant at Aon Employee Benefits said: “Whilst these challenges are by no means new, they serve as a stark reminder that there is still a lot of work to do to ensure that pension scheme members receive the outcome they are aiming for at retirement.” The report’s recommendations such as encouraging higher pension contributions and postponing retirement also included:

  • Strengthening regulatory framework to help providers deal with uncertainty around longevity
  • Encouraging employees to contribute higher amounts into pension schemes for longer periods of time
  • Reducing the number of opt-outs for auto-enrolment
  • Using effective pension communications to help rebuild trust in the industry

Pablo Antolin, principal economist and head of private pension unit at OECD described the increasing pressure on government’s finances and increased longevity as issues which are ‘undermining’ pension sustainability.

“Although many members have begun in-depth reforms, this is still work in progress. It will take many years to embed the changes and further measures will be required to strengthen private pensions, increase coverage and contributions, and reinstate public trust,” he said.

Taylor added: “It has always been a challenge to encourage individuals to plan for their retirement especially when it is 20-30 years in the future. All too often, the preference is to spend money on something that will provide immediate benefit rather than thinking of the long-term. The recent announcement on the increase in retirement flexibility will certainly help but more needs to be done to encourage more people to plan adequately for their retirement.”

 

 

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