Summary and policy recommendations

The report found that the current state of the nation’s savings continues to be polarized. As in previous years, we have about 30% of the population who are on track for a really comfortable retirement. But there’s another 30% who are only going to be able to make ends meet and have a basic standard of retirement. And there’s 31% of people who won’t even have enough money to enjoy that very basic standard of living in retirement.

Now, that sounds quite grim, but it’s actually an improvement on last year. Last year, we had 39% of people who were going to be retiring in poverty, not making it to that basic level. That has reduced down to 31%. We found that the biggest barriers that stop people saving for retirement are really just the day-to-day pressures of making ends meet and dealing with the increasing cost of living.

The report highlights a number of groups who are at particular risk of pension poverty. In particular, the self-employed. They don’t currently have an equivalent of auto-enrolment, which was introduced under the last Pensions Commission. And we’ve also found that people who have a vulnerability—either a physical vulnerability or a mental vulnerability—are less likely to be in those highly paid, full-time jobs for most of their working lives.

Thinking specifically about the self-employed, there are a number of things that could be done to improve their outcomes. We actually undertook some prototyping of a concept proposition that might work with the self-employed, and we trialled it with self-employed people, and it proved very popular. But what we learned was that the self-employed need much more flexibility in terms of how and when they save because they often don’t know how much money they can put aside for the future.

To ensure that people are planning for retirement, there are a number of things that they should do. The first thing to do is to start saving as early as you can. Pension contributions are a bit like snowballs; when you roll a snowball down a hill, it gets bigger and bigger. Pension contributions are a bit like that. So, a pound that you put into your pension in your early 20s has about four times the buying power in retirement of a pound that you save later in your 50s.

Many employers, particularly the larger employers, will have tiered contribution rates. So, the more that you put in as an employee contribution, the more that they’ll put in as an employer contribution. And the last thing to think about is how your money is invested. Your money can be invested in ways which are less volatile or much more volatile. The more volatile investments tend to have higher growth in the longer run, but you don’t want to be in something that’s volatile as you get close to retirement because you don’t want your pot to have reduced in value just as you’re about to retire.

People need decision-making support. Some of the decisions that people have to make are really, really important and sometimes they’re irreversible. The industry has a number of tools at its disposal. There are tools which are free; we often refer to those as guidance. So we can supply pension scheme members and customers with lots of information to allow them to make their decisions. And we’re trying to do that more intuitively. We’re using technology; we’re gamifying things to make it a bit more fun and a bit more interesting.132

At the other end of the spectrum, there is full financial advice from a professionally qualified expert. So the decision that people will have to make when they’re considering the best type of decision-making support for them is the extent to which they want that support to be very personalized and very specific. So people will have to think: how personalized do I want it relative to my willingness to pay?

The timing of this Scottish Widows retirement report is really significant because recently the government established a Pensions Commission. The last commission ran between 2002 and 2006, and it gave us big changes like auto-enrolment and reforms to the state pension. We’re expecting this Pensions Commission to also lead to major reforms. So the information, the statistics, and the recommendations that we have in this year’s report are really timely in terms of informing the work of that commission.

The three big things which we would like to see the government doing differently are:

We would like to see the statutory level of saving for employed people increase from 8% to 12%. We would like to see an equivalent of auto-enrolment introduced for the 4.5 million self-employed people in the UK. And the third thing that we want to do is we want to increase the interoperability of pensions amongst the rest of people’s personal finances, such as their other savings, their investments, and the equity in their home.

People need to be thinking about this much more in the round for decades to come. Most people in the country won’t have enough in their pension pot to see them through retirement. But if they look at their pension pot in conjunction with their other savings and investments, and particularly equity that they may have in their home, there probably is enough money in the round to get them over the line.

The government has an agenda called the open finance agenda which is going to lead our financial services industry towards a world where all of your personal finances appear in one place, irrespective of which company they reside with. In the future, it’s going to be increasingly possible to manage all of that in the round. So, we’re very supportive of that.