October 2007

A rose-tinted future

Over the next few years, the government will push through its pensions reform agenda. The introduction of auto-enrolment and mandatory employer contributions for most employees certainly addresses the 'supply side' of why people are not saving more for their retirement. Although these measures are needed to encourage more people to save more money, the talk so far has been about schemes and contributions, rather than addressing the 'demand side' and the culture change that's needed to make pensions reform a success.

The UK seems to have lost its savings habit. Figures recently released by the Bank of England show that the amount families are borrowing against the value of their property is on the increase. As property prices rise, households are tapping into 'unused equity' in their property and borrowing more money from their mortgages to meet their financial needs.

Worryingly, it seems people are, on the surface, comfortable with this. AEGON recently conducted some research into attitudes towards saving for the future, entitled A rose-tinted future? The survey revealed a 'reality gap' between the income people are expecting in their retirement, and what they are actually on track to receive.

The key findings of the report revealed the population is split down the middle in its attitude to saving. Of those surveyed 54% say they plan for the future, while 46% admitted they live for today.

The percentage of people falling into the 'live for the moment' category was slightly higher for the age groups 16-24 and 35-44. This makes sense, as they are typically burdened with the highest levels of financial commitments. The former category is probably surviving on low disposable incomes. Some might be paying out high rents, paying off student loans or saving for a deposit for a house. However, some could just be making no effort to save anything. The latter group are probably struggling to meet the financial commitments that come with family life. Women also came out slightly higher with 48% living for the moment. Again, this is probably indicative of lower disposable incomes, given that most day-to-day needs tend to be met from income.

Meeting investment targets

However, even more concerning is that only 37% of respondents thought they were saving and investing enough now to provide a lifestyle they would be comfortable with in retirement. The key question is whether the other two thirds of the population are aware of how far off their target they are, and if they are taking any action to address this. They could simply be avoiding the question of income in their old age by burying their heads in the sand. Indeed, 20% said they didn't have any savings (including a pension) at all.

There also appears to be a reality gap between the ages people want to retire at and when they will actually be able to retire. In the survey 35% believed they could realistically retire between 60 and 65, and 25% believed they could retire before 60. This is at odds with the accepted belief - echoed by the Pensions Commission - that we are all going to have to work for longer and save more. It also ignores the fact that the state pension age is now going to increase in phases to age 68. Coupled with the fact that the majority of people accept they are not on target to retire, there could be some nasty shocks in the future.

However, people do seem to be awake to how longevity has increased over recent years. When asked how long they would expect a 30-year-old male and female to live, almost half replied 82 and 85 respectively. Worryingly, however, 6% thought the ages would be 65 and 71 respectively.

Unfortunately, this knowledge doesn't appear to have translated into a need to build up a bigger pot of money, and generally people appear to grossly underestimate how much accumulated fund is needed to provide a substantial retirement income.

For example, 53% of the survey said they would need an income of between £10,000 and £20,000 each year to live a comfortable lifestyle in retirement. They see themselves as fit and able pensioners enjoying an active lifestyle, once financial commitments like the mortgage have been paid. However, a male aged 65 today, in good health, would need nearly £200,000 to buy a retirement income of £15,000 each year. This figure will only increase in the future as the realities of the massive increase we have seen in longevity really hits home. The actuarial profession recently highlighted that longevity increases see no sign of slowing down over the immediate future. If positive changes in society's lifestyle - for example stopping smoking because of the smoking ban - kick in, we could even see the rate of increase rising.

Compare this with the current average retirement pot of just over £25,000, and we paint a depressing picture of the state of UK retirement savings today. However, people do seem to realise - even if subconsciously - their financial predicament. Asked what posed the biggest threat to the value of their long-term savings and investments, just over a quarter (the biggest respondent) admitted they don't actually have any long-term savings or investments. Surely this is the biggest threat of all.

As a nation, we need to find a way of turning this around and recapturing the savings habit. Part of the answer may lie in people facing the unpalatable truth that in order to retire when they want with the lifestyle they want, they have to give up some luxuries of their lifestyle today, and to start saving. However, it looks like people now would rather put their trust in gambling rather than a savings plan. Just fewer than 60% of the survey responded that they spend up to £10 each week on gambling on the National Lottery, pools and bingo; and 6% spend more than that. However, when asked what they would consider to be a bargain for £10 a week, almost half said the ability to retire early.

Reality check

The reality gap uncovered by the survey shows people want to retire on a comfortable income at a relatively early age, but that, on the whole, they haven't addressed exactly how to do this. It's possible they fear it's going to be too expensive. Introducing auto-enrolment and employer contributions is not automatically going to change the way people view their retirement. Pensions reform stops short of absolute compulsion, and although we can rely on apathy to make sure a large proportion of people start saving something for their retirement, we still need to do more to maximise the amount people put aside for their future.

Bringing around a change in culture is a formidable task, but not necessarily an impossible one. Just watching television programmes from 15 years ago shows how much our attitude to smoking - and showing people smoking in the media - has changed. In addition, very few of us would now consider getting into a car without the 'clunk-click every trip' seatbelt.

The government has to be aware these softer angles are just as important as the 'hard' delivery of pension reform. It will take creativity, time and money to encourage people to take off the rose-tinted glasses and change their approach to saving for their retirement. However, we must realise it is something that we have to do for the sake of future generations.

Rachel Vahey
Head of Pensions Development
AEGON Scottish Equitable