Globally, experts are concerned many people could be sleepwalking into retirement poverty. The World Economic Forum highlighted that the gap between what people save and what is needed for an adequate standard of living in retirement will create a financial black hole for younger generations.
In eight countries, with some of the largest pension markets or populations including the UK, Australia, Canada, China, India, Japan, Netherlands and the USA, the retirement savings gap is projected to balloon to $400 trillion by 2050, unless remedial measures are taken.
With ageing populations putting increasing pressure on global pension and retirement plans, employees, employers and governments need to take more responsibility and act to prioritise pensions and savings.
Different approaches from around the world
In the UK, the Pensions and Lifetime Savings Association (PLSA) has warned that 18 million adults don’t know if they are saving enough into their pensions.
The UK Government introduced a raft of pension reforms to address the savings gap. One of these was Automatic Enrolment introduced in 2012. With more than 10 million people now enrolled in a Workplace Pension, there are still concerns that almost 9.3 million workers aren’t saving into a plan or did not qualify to be enrolled because of their age. This includes self-employed people who make up around 15 per cent of the UK workforce.
Another reform was introduced in 2015 with ‘Pension Freedoms’ which gave people greater choice about how to access their pensions from age 55. The downside, there are genuine concerns people will run out of money even more quickly. The World Economic Forum has warned that retired people in the UK will on average outlive their savings by more than 10 years.
Compare this with Australia’s pension system, often hailed as one of the best in the world. Australia was ahead of the curve when it made contributions into its Superannuation fund system mandatory in 1992 for all employees older than 17 and younger than 70 earning more than $450 (AUD) a month.
This made Australians more aware of the need to save which has become ingrained over time. Australian employees, on average, save four times more into their pension pot each month than their counterparts in the UK.
The country currently has a three-pillar pension system, which includes a means-tested, tax-financed Age Pension that provides basic benefits and individually funded pensions accounts provided by Superannuation funds.
Currently employers are required to make Superannuation contributions of 9.5 per cent of their workers’ gross earnings; but this is set to rise to 12 per cent in five annual increases starting from July 2021.
The Australian Government says this is necessary to keep up with rising life expectancy and help ensure workers have enough for their retirement.
But there are real concerns here too, that retirees will increasingly be living in pension poverty. Research from the University of Tasmania found that more pensioners than ever are having to work part-time just to get by, with nearly 5 per cent of pensioners now doing paid work.
Other countries such as Singapore have seen major pension reforms too. Singapore’s central pension plan is now considered one of the best in Asia, with a retirement income system mainly based on the Central Provident Fund (CPF) which covers all employed Singaporean residents and permanent residents.
The Singaporean Government also helps to supplement the CPF savings of lower wage workers through schemes such as Workfare and top-ups to Medisave for senior citizens.
However, a recent survey by digital wealth manager Syfe, found that most Singaporeans are at either the highest level of retirement readiness or at the lowest. The firm said that this trend may reflect the widening income gap in Singapore.
In Dubai, where expats make up 85 per cent of the workforce there are also some welcome changes. Although Emirati nationals have pension entitlements, there has been no formal pension provision for expatriates, and no mandatory company pension plan across and of the seven independent city-states forming the UAE.
However, the Dubai International Financial Centre, DIFC, recently announced the launch of its Employee Workplace Savings, DEWS, scheme, which will offer end-of-employment benefits, as part of a funded and professionally managed contribution pension plan.
This move is great news and also makes Dubai an attractive destination to work until retirement.
Action needed in UK
What’s clear is employers and governments around the world are doing a huge amount to improve investment returns and the management of pensions, but individuals need to be more accountable and take personal responsibility too.
It’s not just pension savings – individuals should be considering other investments, such as cash, tax-efficient vehicles (such as Isas) to boost their retirement income. For employers, ensuring a robust pension strategy and having an established independent and impartial corporate governance approach is essential.