- Both UK and US drop in Global Retirement Security Rankings
- US falls due to sharp income inequality and reduced workforce to support retirees
- UK is two spots away from being in the bottom 10 for government indebtedness
- FCA’s Andrew Bailey says “clear risk” that savings rate for retirement is too low
- UK’s retirement savings gap set to widen to £2.3trn due to automation of jobs
- UK expected to fall into major pensions crisis by 2028
The economics of retirement funding is at breaking point. Thanks to low interest rates, looming inflation rates and slow growth the future of our retired populations are at serious risk.
Currently there are 600 million individuals placing pressure on already-established retirement systems. This is set to get worse as the results of the last decade of financial experimentation show themselves and ageing populations widen the cracks in our economies.
Most pension schemes were formed in a time when manufacturing and traditional bricks and mortar business were the pinnacle of Western economies. This is no longer the case. Globalisation has seen countries switch to service economies. Our financial planning has failed to keep up.
Both the United States and United Kingdom are performing so badly in retirement planning that they have dropped rankings in the Global Retirement Security Rankings.
The global retirement crisis is playing out against a backdrop of a much greater economic crisis. There is slow economic growth across major nations, rising inflation levels and a major debt crisis. No-one really knows how this is going to end.
No stranger to the United Kingdom
Natxis’ Global Retirement Security Rankings sees the United Kingdom drop one place from last year. This is mainly due to a fall in it’s health score.
It is its finances sector though which is bringing it down the most and a point of real concern for pensioners of the future.
The UK still ranks in the bottom 10 for the Finances sub-index, despite improving in both rank and score from last year. For the second year in a row, it scores 1% in the interest rates indicator and is only two spots away from being in the bottom 10 for government indebtedness.
The U.K. is no stranger to pension crises. In the last five years we have sadly seen what bad planning, mismanagement and lack of government oversight can mean for pension funds. Tata Steel, Woolworths and BHS are just some that come to mind.
A Pensions and Lifetime Savings Association report finds that three million workers with final salary pensions have 50% chance of losing up to fifth of their income because their employers have made unaffordable promises.
The PLSA data finds the most vulnerable employers have a 50:50 chance of not having an insolvency event in the next 30 years:
“More than 11 million people rely on defined benefit pension schemes for some or all of their retirement income but there is a real possibility that without change we will see more high profile company failures such as BHS or Tata Steel.”
Former pensions minister Steve Webb told City A.M. that he agrees:
“It’s not enough money. It’s just brutally not enough money going in,”
Just this week FCA Chief Executive Andrew Bailey made a point of the dangers looming for retirees, in his annual Mansion House speech:
“There is a clear risk that the savings rate for retirement is for many people too low to meet their expectations of retirement.”
For future workforces the situation is unlikely to improve. Last month pension consultants Hymans Robertson warned that a third of UK jobs were at high risk of automation by 2030.
The FT reported:
“If one in three jobs are at risk of automation by 2030, as estimated, then this would mean retirement shortfalls increase to £2.3tn, or one year’s current UK economic output.”
Poor State of the United States
The United States’ new ranking puts it below the Czech Republic and Belgium. It dropped three places, down to 17th place in a global index of 25 countries.
Index producers, Natixis, explain that ‘While the country has the fifth- highest income per capita, inequality remains an area of concern given it has the sixth-lowest score for income equality.’
This does not help pension contributions. Research shows that Nearly 40% of U.S. workers are not offered any payroll savings options. Around 30% of American workers have no retirement savings at all.
As in the U.K. there are a number of studies that work to estimate the size of impending retirement crisis, each with varying (but all worrying) results.
The most pessimistic is from the National Institute for Retirement Security. The Institute finds that 84% of American households are falling short of acceptable retirement savings targets. They estimate that total household undersaving may reach $14 trillion.
When it comes to government run plans, the shortfall is just as depressing. Andrew Biggs of the American Enterprise explains:
Estimates of total funding shortfalls for government-run plans range from a low of $14.3 trillion to a high of $26.1 trillion. The higher estimates are generated by economists who seek to more accurately measure the benefit liabilities of public sector pensions.
In regard to the U.S. the WEF concluded that the situation was as dire as it was for the U.K. 85% of the retirement savings shortfall is in government plans, with corporate plans making up 2% and households the remaining 13%.
How to solve a problem like retirement
We need leaders to take note of the retirement problem and recognise it for what it is: a looming crisis. Public policy is the only real way over 600 million Westerners are going to be supported in what is currently looking like a dire situation.
Currently governments are adopting a ‘wait-and-see’ approach. See the recent UK pension dramas of Woolworth, Tata Steel and BHS. None of those were a surprise, people must have known they were coming for years. But it took a last minute call to the government to try and solve the problems.
‘Luckily’ the UK government could just magic up some money to either stump up the pension pots or force those responsible to do the same. The problem is, there is a £1.5 trillion pension shortfall at the moment. This is set to grow, the British government is broke. They cannot keep balling out retirement funds.
Right now companies who cannot afford to pay the pensions they have promised staff will have their pension schemes rescued by the Pension Protection Fund, government service. Those affected may receive up to a fifth lower than what they were originally promised.
In the U.S. politicians have promised deal with this upcoming crisis through a combination of expanded Social Security benefits and new state-sponsored retirement.However, this doesn’t work for political gains.
Andrew Biggs explains:
In government, by contrast, the incentives are in the wrong direction. When government retirement plans are underfunded, politicians can keep current taxes low while handing the bill to future generations. And of course future generations don’t vote in today’s elections. This explains why Congress has done nothing to fix Social Security, despite knowing since the late 1980s that the program needs reforms.
Sadly the ‘solution’ offered by large think tanks and government bodies is that we just need to figure out how to get people working for longer:
“Policymakers do need to be thinking now about how to integrate 75- and even 80-year-olds in the workplace,” Michael Drexler, head of financial and infrastructure systems for the WEF told The Financial Times.
Getting people to work longer is ok in theory but in reality it’s not practical. One just needs to look at the medical bills for the elderly and realise this.
Ultimately, the key is to generate sufficient economic growth to plug the gap. But we come full circle, governments appear to have no plan as to how to make that happen. We need to take responsibility.
Do not rely on employers and the government in retirement
As we recently discussed, the OECD believes the UK’s pension deficit to be far greater than aforementioned UK bodies have assessed.
In May they estimated that the pension shortfall is higher than £6.2 trillion. The OECD expects it to increase by around 4 per cent per year, reaching more than £25 trillion by 2050.
Following a month of political party conferences in the U.K. and a year of Trump’s election pledges, there has been little mention as to how the looming deficit will be managed.
It is vital that savers and investors begin to take responsibility for their own pensions and ask questions. Most importantly one must ask if you can hold gold as part of your pension.
The economy shows that whilst stock and bond markets have done well in the short term and they are artificially overvalued. Once again this is with thanks to the easy monetary policies of central banks and governments.
This is where gold plays a key role.
Dr. Constantin Gurdgiev, formerly an adviser to GoldCore, says the following about the importance of having gold in your pension:
“Gold is a long-term risk management asset, not a speculative one.
The pension crisis is a multi-trillion dollar/pound crisis. It is not going to go away. Adding gold to your pension is a key way to protect your retirement from the pensions time bomb.
Pension funds, throughout the West, have a distinct lack of diversification when it comes to assets. This has cost pension holders a huge amount of money and places their future livelihoods and risk.