Shortfall for Brits in Pensions

A new report on pensions from Datamonitor reveals the average worker in the UK needs to contribute a further GBP50,000 to their current pension fund, if they are to achieve a comfortable standard of living in retirement.

Failure to do so will mean shortfalls in their retired income, averaging GBP4,000 per annum. This is despite the fact that the UK already has by far the largest pensions savings market in Europe, and one of the highest levels of pensions savings per head of population. In countries such as France, Italy and Spain individuals often make almost no contribution to their pensions schemes, and yet enjoy up to 80%of their working salaries in retirement. The additional GBP50,000 per worker would equate to the average individual getting two-thirds of their working salary once retired.

UK workers have on average currently saved only GBP30,000 per person in their private pension funds They will need to find the additional funds before they retire in order to create a pension of the recommended level, i.e. replacing two thirds of their working salaries. Without additional contributions, the average UK worker would have a retirement income of GBP13,000 per annum from a combination of state pension and private pensions savings.

Oliver Guirdham, Life and Pensions Analyst at Datamonitor comments 'we are talking about the funds that people will need on the day that they retire, so for many people there is still time to adjust. UK citizens have built up relatively large private pensions savings relative to many European countries, however there is still the need for more, and the government needs to help them do this. Initiatives in this direction, such as the stakeholder pension, have thus far largely failed.' UK private pension holdings were hit hard by the equity bear market between 2000 and 2003 and the UK government has exacerbated the problem by removing tax credits from pensions schemes, a change estimated to reduce pension savings by GBP5bn per annum.

This is despite the fact that the UK has by far the largest private pension market in Europe. In 2003 UK private pension funds were estimated at around EUR1,900bn, dwarfing the next largest market in Europe, the Netherlands, which has only EUR500bn held in private pension funds.

However in many European countries the level of private pension saving is much lower, with workers relying on the state to provide up to 80% of their working salaries in retirement. In France for example the average worker has only EUR3,000 of private pensions savings while in Italy this is even lower at EUR1,000. This is because there is currently little incentive for workers to save, with the government replacing up to 80% of their salary in retirement with state pension payments. However, this situation is not sustainable in the long term. Guirdham comments 'The countries where the state contributes most to people's pensions in Europe, Italy France and Spain, are unfortunately also the countries where the population is aging most rapidly. This means that the strain on workers to pay for the retired will become unbearable in the next 20 years. The problem is that the governments of these countries have not found the political will to make the necessary reforms to their pensions systems. If they do not do so they will face a crisis.'

Datamonitor believes that Germany will be the most attractive in Europe for pension providers over the next five years, offering strong growth in occupational and private pensions. The French, Spanish and Italian markets will also grow quickly in percentage terms. However Datamonitor sees limited evidence of the kind of exponential growth in occupational pensions that would be needed to really counter the potential pensions crisis in these countries.

All articles 2006-23 written and edited by Mel Crowther and/or Nick Thomas, 2024- by Nick Thomas, unless otherwise stated.

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