Pensions cuts of nearly 80% in the last 10 years, as a result of lower returns on investments and reducing annuity rates, could leave savers in a National Pension Savings Scheme (NPSS) with inadequate pensions, claims consulting firm Watson Wyatt.
According to the firm, these lower returns mean 20 years worth of pension savings are actually worth less than half of what it would have been 10 years ago, while annuity rates - used to convert pension pots into income - have also fallen by almost 50% over the same period
Watson Wyatt claims when these two cuts in pension provision are combined, resulting income is down by 78% on savings of identical amounts between 1996 and 2006.
The research shows an average 20-year with-profits maturity value at £200 a month in 1996 was worth £287,413, but just 10 years later the sum has fallen to just £121,452, while annuity rates have dropped from 79.14 per £1,000 in 1996 to just 41.2 a decade later.
Following the start of the National Pensions Debate with a discussion into the NPSS and its alternatives, Watson Wyatt warns the Pensions Commission’s recommendations, while encouraging people to save more, do not take into account the extent to which returns from savings can fluctuate.
Stephen Yeo, senior consultant at Watson Wyatt, says: “People on above average incomes, or those saving with the benefit of a significant employer contribution may be able to tolerate such wide fluctuations, but it is less clear the NPSS will provide pensions that are suitable for the vast bulk of savers who need the proceeds of the NPSS to provide a basic standard of living in retirement.”
He warns if the government opts for a system where individuals bear all the investment and longevity risk there is a good chance a significant number of them will end up with inadequate pensions.
Yeo explains the cost of pensions has risen because of lower investment returns and greater longevity, so people saving for their own pension need to respond by saving more or working for longer.
He says those lucky enough to have a defined benefit (DB) pension provided by their employer will not be affected, although he says the figures do shed light on why the cost of DB pensions has risen so sharply.
But Yeo adds: “Unfortunately, private sector employers are now in sharp retreat from sharing any of the risks of providing pension and the Pensions Commission’s recommendations will do little to arrest this trend.”
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