Stephen Bird, chief executive of Abrdn, has said that contributions to workplace pensions must double to avoid a ‘very real crisis’ in ensuring individuals have adequate income in retirement.
The leader of the global investment company, which manages £0.5 trillion in assets, said that defined-contribution (DC) pensions will not provide the safety net implied by the word “pension” with only 8% of salaries being paid into those schemes annually, as they are currently.
Writing in The Times, Bird said: “This needs to change. To have any chance of achieving decent retirement outcomes, the contribution rate needs to double, taking it closer to the levels seen in other developed economies, or indeed, the Abrdn employee scheme.”
Pension contributions
DC pension reforms announced by government
The UK introduced auto-enrolment in 2012, with employers and employees each contributing a minimum of 1% of wages into their pension.
This was later raised to a minimum 3% contribution from employers and 5% from employees. Bird believes that total pension contributions should double to 16%.
He said the first priority was to get more money diverted into pension savings. “Once we have broad political consensus on that point, then we can spend more time thinking about what those schemes invest in, the returns they achieve and what can be done in turn to ensure that those savings contribute to more vibrant capital markets in the UK,” he added.
Bird said that, of the roughly £3 trillion held by about 25 million people in UK pensions, the average return on British pension assets between 2010 and 2020 was 6.2%. While comparing favourably with the US (4.9%), this return significantly lags behind other countries such as the Netherlands (7.6%) and Australia (7.5%).
“On some estimates, those lost returns mean that a typical UK saver setting aside cash every month for 30 years would end up with a pension pot 30% smaller than the average Australian saving the same amount. That’s a big gap,” said Bird.
Many agree that pension contributions should increase but that such a large rise could encourage employees to opt out of schemes and reduce government tax revenues from income.
Craig Beaumont, chief of external affairs at the Federation of Small Businesses, told the newspaper that a move to 16%, “while good from a City fund manager perspective” would be an “unreasonable squeeze on both employees and employers.”
A private members’ bill, the Pensions (Extension of Automatic Enrolment) (No. 2) Bill, is currently being scrutinised by the House of Lords after MPs and the government backed its proposal to reduce the pensions auto-enrolment age from 22 to 18 years old and abolish the lower earnings limit of £6,240 per year. Beaumont added that these changes “should be given time to bed in”.
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