The UK's pension saving, or lack thereof, has proven to be a persistent puzzle for policymakers.
While those in defined benefit pension schemes may feel secure in their retirement, the majority of Britons will be relying on defined contribution pensions to see us through our golden years.
At current reckoning, Quilter estimates individuals will need a £738,000 sized pension pot to live on comfortably by the time they retire. As may be obvious to many, very few people are likely to meet that level once they come to retire.
The latest figures from the Office for National Statistics suggest the median pension pot for 55 to 64-year-olds from 2018 to 2020 was £107,300.
Added to this is the state pension – payable from age 67 – is only £8,814 for the basic state pension, or £10,600 for the full state pension, for a single person a year.
This means there is pressure to find ways to improve the long-term prospects of the UK working population so Britons are not heading for mass penury in 20 or 30 years' time.
Flurry of initiatives
Over the past year there have been a flurry of initiatives, announced by chancellor Jeremy Hunt in collaboration with the Department for Work & Pensions, Financial Conduct Authority and The Pensions Regulator, to 'fix' the DC pension system to find ways to ensure better outcomes.
Many people accept there are plenty of inefficiencies in the system.
Due to auto-enrolment, which sees everyone who works saving something along with their employer – assuming they do not opt out – there are thousands of small pots, some of which are not even covering their costs.
But even further up the scale, ministers view the current system with tens of thousands of schemes, and many thousands of pots, as inefficient, and unable to invest at scale.
On top of this, many people do not even know how much they have or where it is invested, so are unaware of where they stand.
There have been plans in train to deal with this latter issue, through the pensions dashboard, but Hunt would like to go much further, and condense the number of pots and schemes, which the DWP, TPR and FCA expect would create a more efficient system, and invest in a wider variety of assets.
A big inspiration for this is Australia. Hunt has been unsubtly referencing the Australian system in all his announcements regarding pension reform, and it is here where DWP officials are looking for guidance.
Australia instituted a new DC scheme 30 years ago, when their policymakers realised that their DB system and means-tested state pension were not offering enough coverage for ordinary people.
With politicians and regulators devising a new way to make pension contributions and monitor pension fund performance, there are now 134 superannuation funds (excluding those that have less than seven members), amounting in total to A$3.5tn – 30 per cent larger than the Australian economy according to GDP.
