The UK pensions system remains relatively ungenerous and unequal compared to other countries, the Organisation for Economic Co-operation and Development (OECD) has said.
In its annual Pensions at a Glance report, the body found the net replacement rates for future retirees from mandatory parts of the retirement system, such as the state pension, will be the lowest of any OECD country.
Full-career average earners can expect a 29% replacement rate which falls considerably below the OECD average of 63%.
While low earners will do better and have a replacement rate of 52%, this is still very low relative to other OECD members as only Mexico and Poland will have worse rates, the report added.
However, the OECD noted there are some bright spots in the findings such as the introduction of auto-enrolment in 2012.
The policy has led to a reversal in the downward trend of workplace pension participation for private sector eligible employees, jumping from 42% in 2012 to 70% in 2016.
Furthermore, private pensions could help fill the replacement gap, adding around 30 percentage points to the net replacement rate with a full career of coverage.
Similarly, the introduction of the new single-tier pension – 30% higher than the old state pension – should improve the overall picture facing UK savers.
But there is a long transition period and current retirees will not see a difference in their outcomes.
There is also a danger pension freedoms could increase inequality which is exacerbated by the rigidity of the state pension.
OECD Secretary-General Angel Gurría said: “The challenges of financial sustainability and pension adequacy mean that bold action from governments is still needed. The world of work is changing fast and policymakers must ensure that decisions made today take this into account and our pension and social protection systems do not leave anyone behind in retirement.”
AJ Bell senior analyst Tom Selby added: “This report emphasises the importance of maintaining incentives to save and ensuring people have confidence that the rug won’t be pulled from under their feet by politicians prioritising short-term cash generation over long-term policymaking.
“Countries such as Sweden have managed to build cross-party co-operation into their political system to encourage stability – a similar deal in the UK could be transformational and encourage more people to save earlier for retirement.”
Just group communications director Stephen Lowe said the UK has the highest dependence on private pensions. “Average earners reaching retirement can expect a pension worth only 29% of their working income from state and other mandatory schemes, compared to an average replacement rate of 63% for the 35 OECD countries.
“The OECD notes that pension freedom rules allowing cash withdrawals from private pensions may lead individuals to spend money lump sums early or underestimate their life expectancy through drawdown, leaving them with limited resources in old age.
“It is clear that the standard of living UK pensioners enjoy depends to a large extent on how much they save, how long they work and the decisions they make at retirement.”
He added: “Our research found only four in 10 over-50s found pensions easy to understand and only half said they were confident making pension decisions. Support in the form of impartial, free at the point of use, government-backed pension guidance is on offer but too few currently use it. Receiving guidance needs to become a normal part of deciding how to use pension savings – a new social norm. At the moment it is easy to ignore it but auto-enrolling people into the government’s guidance service will provide a much stronger nudge and ultimately help to address some of the concerns the OECD has about the future of our pensions.”