Why the COVID-19 outbreak could have created a ticking time bomb for pensions

By Joe Cockerline, Senior Consultant

The full economic and financial impact of the COVID-19 outbreak has just started to be truly felt. 

The UK has seen what may be only the beginning of a series catastrophic job losses as its furlough scheme begins to taper. It’s easy to lose sense of the true impact of these job cuts – with more than 24,000 jobs being lost in the retail sector alone since the start of the pandemic^[1]. Each loss is a harsh blow for the individual and family concerned and underlines the challenge of balancing the economic realities of the pandemic with the importance of preserving peoples’ health. 

The immediate financial impact of a job loss becomes quickly apparent and it seems increasingly clear that further government and central bank support may be required to cushion the blow and help those most in need. However, what’s harder to quantify and act upon is the lasting impact on consumer behaviour and long-term financial wellbeing – notably, the impact on pension saving rates. 

The UK isn’t alone is having a persistent issue with pension saving. It’s a truly global problem – the World Economic Foundation warned in 2017 that the global retirement savings gap (that is, the gap between what consumers are saving for their pensions and what they need to secure a comfortable retirement) will increase from $70tn to $400tn by 2050^[2]. The pandemic looks set to accelerated and exacerbated this trend. 

This issue rests largely with the proportion of people who save into a Defined Contribution scheme (or a workplace pension scheme), now the default option for the majority of UK workers, as well as those in other markets such as Australia and the US. This, of course, is the system under which employers’ make a salary percentage contribution to a pension saving scheme, with employees contributing towards the same pot. 

Workplace pension savings had been gradually increasing, with 88% of eligible employees saving into a workplace pension scheme in 2019 (up 1% from 2018, according to stats from the Department for Work and Pensions)^[3]. However, that still means that at least 12% of the workforce, potentially millions of people, were falling through the cracks – and that’s before the outbreak of COVID-19 and the associated impact on jobs. 

In the worst-case scenario, if we see long term and persistent unemployment, huge swathes of the workforce could fall behind on their contributions and be left with a proverbial mountain to climb to ensure they’re able to secure their retirement income. Likewise, and even if we see a moderate bounce back in jobs figures, the attitudinal change to savings behaviour could be truly seismic. The pandemic has underlined the benefits of access to liquid savings. Indeed, consumer spending in the UK has dropped by £17.9bn per month, or around a third, which translates to around £126 extra per week back in the nation’s pockets^[4]. However, signs are that appetite for saving is currently focussed on the short term, potentially at the expense of building a healthy retirement in the longer term. 

If consumers who hold on to their jobs, or find new work, decide that their saving priority rests with the here and now and cut down their pension contributions as a result, the retirement gap will increase. The average person approaching retirement estimates that they need an income of £34,000 per year to achieve their goals, amounting to a pot of £903,000 by the age of 65 – a lofty goal for many^[5]. Falling behind on contributions now could have a huge impact in later life. 

So, what can be done to resolve the issue? It’s clear from the research that the key touch point to encourage retirement saving is within the workplace. A report released last year by Punter Southall Aspire found that 68% want their employer to keep reminding them about any actions they need to take concerning their pensions^[6]. The appetite is clearly there among employees for their employers to take an active role in informing and encouraging their pension savings. 

This is undeniably a communications challenge. Employers’ role is to provide clear, concise and actionable guidance on employee pension savings, updating them on any employee contribution rates and signposting them to the wealth of resources on offer from scheme providers. The industry has made huge strides in providing consumer-friendly interfaces, in many cases allowing scheme members to access online portals that allow them to manage to their funds. When employees are aware of the importance of both saving and monitoring their pots, the first step in engagement has been made and the importance of this long-term savings behaviour has been understood.  

Likewise, the pensions industry has a role to play in adjusting its messaging to a post-COVID world, providing appropriate educational resources and banging the drum to ensure that pensions aren’t a forgotten issue in the myriad of concerns that accompany the ongoing pandemic. 

With so many pressing issues facing us in the here and now, it’s easy to overlook what the impact of the COVID outbreak may be in 30, 40 or 50 years. Nevertheless, this impact is real and will be felt by millions of working people around the world. The UK has an opportunity to defuse a potential ticking time bomb and allow millions of savers to secure their futures. 

^[1] Daily Mirror: “UK facing job cuts bloodbath as BA, Topshop, John Lewis and more axe thousands of staff” 6th July 2020 https://www.mirror.co.uk/money/uk-facing-bloodbath-job-cuts-22307491

^[2] Financial Times: “Raiding the pot: Pandemic deepens pensions crisis” 29^th June 2020 https://www.ft.com/content/ec4babc0-75c5-4d60-a675-ca66de8da8fd

^[3] FT Adviser: “Workplace pension saving on the rise” 18^th June 2020 https://www.ftadviser.com/pensions/2020/06/18/workplace-pension-saving-on-the-rise/

^[4] Independent: “Coronavirus turns UK into a nation of savers” 12^th May 2020 https://www.independent.co.uk/money/spend-save/coronavirus-saving-emergency-furloughed-income-redundant-recession-bills-a9509816.html

^[5] Sanlam Wealthsmiths: “How much do I need to save for an average retirement income?” 14^th November 2019 https://www.sanlam.co.uk/knowledge-hub/insights/whats-your-number/saving-for-an-average-retirement-income#_edn1

^[6] Funds Europe: “Inside view: Seven steps for better pensions communication” 2019 https://www.funds-europe.com/dc-report-2019/inside-view-seven-steps-for-better-pensions-communication