After defying the doomsayers to narrowly avoid a recession, Britain’s economy is sleep-walking into a different, more insidious threat: its workers are chronically underprepared for their retirement.
Economists are predicting that an ageing population and a lack of pension saving means we are destined for a crisis.
The fallout would destroy Britain’s growth prospects, says former pensions minister Baroness Altmann.
“Over the next 10 to 15 years, there could be a steady decline in growth in Britain if more and more people reach the stage of life where they’re trying to live on their pension savings and they don’t have enough,” she warns.
But as economic growth in Britain has flatlined, is there a risk that this will tip Britain into recession? “Undoubtedly,” says Altmann. “Where will the growth come from?”
Back in 2012, then-chancellor George Osborne revolutionised pensions savings by introducing Automatic Enrolment. The system meant anyone aged 22 or above and earning at least £10,000 was put on a workplace pension scheme.
Before auto-enrolment, just 55pc of eligible employees saved into a workplace pension; by 2021, this had climbed to 88pc, according to the Department for Work and Pensions. In real terms, this meant £33bn more was saved into private workplace pensions in 2021 compared to 2012.
But this policy alone is not enough to save millions from being near-destitute in their retirement.
The DWP estimates that 38pc of all working-age people are not paying enough into their pensions, meaning that 12.5 million people will not be able to retire comfortably.
This calculation was based on a person converting the full value of their pension into an annuity. If people were to take a lump sum and annuitise only 75pc of their pension, the number of people falling short would rise to 14.1 million.
Both of these measures are still relatively optimistic. Based on the Pension and Lifetime Savings Association’s benchmark for a comfortable retirement, 88pc of all working age adults fall short. That means that not even one in eight people working today will be able to retire as they expect.
It raises the serious risk that a whole generation of people reaching the end of their working lives will not have the means to support themselves into old age, warns Lord Alistair Darling.
“There is a real problem that people will hit their fifties and realise that they are never going to save enough to fund their retirement when they eventually stop working. What we need to do is to provide people with the ability to save,” the former chancellor adds.
“Auto-enrolment was a very good start. But, unfortunately, the vast majority of people are not saving enough in these schemes. Just one in five in defined contribution schemes are on track to have a decent standard of living in retirement. That’s far too low,” says Lord Darling.
The pressure on public finances will be enormous. “There is a definite risk of not saving up for retirement, and that risk is exacerbated by inflation. Obviously, that runs the risk of a burden on the state and people experiencing very difficult old age,” says another former chancellor, Lord Norman Lamont.
“Given that we provide most healthcare free at the point of use, this is an issue for the public finances,” warns Carl Emmerson, deputy director at the Institute for Fiscal Studies (IFS).
Between 2021 and 2071, Government spending on a combination of state pensions, pensioner benefits and health and adult social care will soar from 15.8pc of national income to 27.1pc, according to the Office for Budget Responsibility. This marks an increase of 71pc.
Any failures to save properly will be severely magnified by demographic changes. Britain’s population is ageing to such an extreme that the state pension age would need to be raised to 70 to maintain the current level of retired adults at 24pc, the IFS calculates.
Britain is more exposed to this effect than the rest of Europe because our state pension provision is much lower, says Altmann. Although this means the immediate burden on the taxpayer from an ageing population will be less, the economic toll of under-saving for retirement will be much greater.
“The more older people who are poor and can’t spend, the worse for the rest of the economy,” she adds.
Not only will pensioners be less able to spend, they will be increasingly reliant on benefits. “Then everybody loses, the economy loses, they are worse off, and future generations will end up worse off because lower growth today means worse things in the future,” says Altmann.
The alternative is that older people may not be able to retire at all.
“If people don’t have enough at retirement they’re likely to work longer than they might have expected,” says Ruston Smith, who was co-chair of the DWP’s 2017 Auto-Enrolment Advisory Board and is now non-executive chair of Smart Pension and the Tesco Pension Fund.
What needs to change? Smith’s board made two key recommendations, which have now been put forward by the Government in a Private Members Bill: to bring the age of auto-enrolment down from 22 to 18, and to extend it to all earnings, rather than just those in excess of £10,000 each year.
These measures will help, says Smith, but policymakers must tread carefully during the cost of living crisis. Pushing people to make larger contributions could trigger many to quit their pension schemes altogether, he warns.
“People have difficult choices today between paying for their everyday bills and paying off debt whilst continuing to contribute to their pension,” says Smith.
Workers are already quitting auto-enrolment: opt out rates have climbed from just under 8pc to 10pc in August 2022. “Increasing contributions too soon could encourage more people to opt out and break the savings habit that’s been built up, losing out on valuable employer contributions and tax relief,” says Smith.
There are also two key problems that the auto-enrolment programme does not address, says Emmerson. First, a large number of people fall outside the target group.
The self-employed sector is a growing blackhole in Britain’s pension provision.
“Overall numbers of self-employed people have grown since the late 1990s, but we have far fewer saving into pensions,” adds Emmerson.
Second, even those who are enrolled are not saving enough.
The majority of employees who have been brought into a workplace pension through auto-enrolment save at the default rate, while nearly two thirds are saving less than 8pc of their earnings. This is little more than half the recommended 15pc.
Pension funds should be overhauled to redirect more investment into the British economy and secure higher returns for retirees, says Altmann. There should also be more onus on the pensions industry, she adds.
“They should be reaching out to customers and helping them to do more. The pensions industry seems to be a baby bird in the nest waiting for someone else to feed them,” says Altmann.
“That is what auto-enrolment has been. A couple of years ago it brought them all these millions of customers on a plate. Well now it’s their turn to reach out to customers directly and encourage them to do more.”
A DWP spokesperson says: “We are supporting proposals to expand Automatic Enrolment even further, enabling millions to save more, earlier.
“These changes will particularly benefit groups – including women, young people and lower earners – who have historically found it harder to save for retirement.”