UK Pension Savings Shortfall In The Trillions
Thursday, May 12, 2011

The UK is facing a pension savings deficit running into the trillions, a bill which cannot be picked up by the state, says a new report from the Chartered Insurance Institute.

The report, titled "An age-old problem – developing solutions for funding retirement", looked at the level of savings required to fund retirement, once costs associated with long-term care and debt are taken into consideration, basing its figures on the 31m adults due to retire between 2011-2051.

Taking as its starting point the Organization for Economic Co-operation and Development's argument that while an adequate retirement income ought to equate to 70% of pre-retirement income, pensioners receive on average only 30% of this, the CII used two scenarios with which to calculate its figures.

As explained by David Thomson, director of policy and public affairs, the first scenario assumed that those retiring over the coming 40 years will receive this standard retirement income, all have debts to pay and one in four require long-term care. According to statistics from a recent Aviva report, one in five aged 55-64 need to repay their mortgage and owe an average of GBP65,000 (USD106,500).

When this situation is realised, the total UK retirement savings gap amounts to GBP9 trillion, with an individual's average annual shortfall reaching GBP16,700.

The second scenario was slightly more positive, imagining that pensioners achieve 50% of their pre-retirement income and carry no debts into retirement, again with one in four needing long term care. Nevertheless, while the scale of the gap is roughly halved by this scenario, it still amounts to GBP4.4 trillion.

These were calculated on the assumption that it costs GBP22,050 to live adequately per annum, with debts (including those for the repayment of mortgages) totaling GBP50,000 and the average cost of long term care per year sitting at GBP26,000.

In spite of the "massive" scale of the UK's problem, Thomson does not believe the issue insurmountable. Instead, he highlights three key issues at the core of the matter:

• According to Thomson, the government needs to provide the public with a clear explanation that it will not, and cannot pick up the bill for the entire shortfall;
• The financial services sector must shoulder its responsibility and embrace reforms in legislation aimed at improving the standards of and levels of trust in financial products and providers;
• Cross-party collaboration must be improved, in order to provide greater certainty on future rules, with public engagement required to build understanding and acceptance of the action required.

Commenting on the report, Minister for Pensions Steve Webb said that: "The next generation will face a different world, with increasing life expectancy, the decline in final salary schemes and lower annuity rates. They are going to have to take greater responsibility for saving for their retirement".