The UK Pension Crisis: Contributions versus Performance

Introduction

The UK is facing a pension crisis that threatens the financial futures of millions of employees. As an employer, you play a pivotal role in addressing this challenge. With the shift from Defined Benefit (DB) to Defined Contribution (DC) pension schemes, responsibility for securing adequate retirement income has shifted to employees—yet the system is failing to deliver.

This article highlights the heart of the problem—poor pension performance—and explains why simply increasing contributions isn’t the solution. By focusing on performance, employers can help employees achieve financial security while reaping the benefits of a more engaged, productive, and loyal workforce.

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Key Takeaways:

• The UK pension crisis stems from low-performing pension schemes, not just insufficient contributions.
• Relying solely on increased contributions is unsustainable for employees facing rising living costs and businesses under financial pressure.
• High-performance pension schemes like eurikah deliver superior retirement outcomes within the mandatory 8% contribution level.
• Superior pension performance reduces financial stress, enhances productivity, and positions employers as leaders in employee well-being.
• eurikah provides a seamless, scalable solution, offering substantial returns without additional financial strain on employers or employees.

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The Pension Crisis at a Glance

The pension landscape in the UK has undergone a seismic shift in recent decades. Today, most employees rely on DC pensions, where outcomes depend on contributions and investment performance. Unfortunately, research reveals that:

• 61% of private sector employees are saving less than 8% of their earnings for retirement, and 87% are saving less than the recommended 12%. (IFS, PLSA)
• The majority of DC schemes fail to generate strong returns, leaving employees with inadequate retirement savings. (The Times)
• 1 in 6 pensioners are living in poverty, a stark indicator of how current systems are failing to meet retirement needs. (Joseph Rowntree Foundation)

Employers now face a critical question: How can you support your employees’ retirement goals without placing undue financial strain on your business or your workforce?

Why Contributions Alone Aren’t Enough

It’s a common misconception that increasing pension contributions is the only way to improve retirement outcomes. However, this approach has significant limitations:

• Affordability Challenges:
  • For employees already struggling with the rising cost of living, additional contributions may be unmanageable. In 2023, 22% of UK adults reported borrowing more money or using credit to cope with higher living costs. (ONS)
  • Research shows that increasing combined contributions to 14% could reduce disposable income by 11% for the lowest earners, exacerbating financial strain. (Oxford Economics)
• Business Pressures:
  • For small and medium-sized enterprises (SMEs), raising employer contributions can place significant pressure on already tight margins.

The reality is that even with higher contributions, low-performing pension schemes will still leave employees short of their retirement goals.

The Impact of Poor Pension Performance

The key to solving the pension crisis lies not in contribution levels but in the performance of pension schemes. Over a 30-40 year career, even small differences in annual investment returns can result in substantial disparities in retirement savings.

For example:

• A pension growing at 3% annually will deliver far less than one growing at 6% annually, even with identical contributions.
• Employees in low-performing schemes could lose out on tens of thousands of pounds over their working lives, undermining their financial security.

Employers cannot afford to ignore the importance of investment performance when selecting a pension provider.

The Case for Better-Performing Pensions

Choosing a high-performing pension scheme benefits both employees and employers:

• Boost Employee Financial Security: Employees in better-performing schemes are more likely to achieve adequate retirement savings without needing higher contributions.
• Reduce Financial Stress: Financial worries impact employee well-being and productivity. In 2023, 50% of UK adults reported worrying about affording essentials like food and energy, with younger employees disproportionately affected. (Mental Health Foundation)
• Improve Employee Engagement and Retention: Offering a superior pension scheme enhances your reputation as an employer of choice, attracting and retaining top talent.

Case Study: Comparing Pension Income Across Scenarios

To understand how pension performance impacts retirement outcomes, we evaluated three scenarios for an average UK worker earning £35,000 annually over a 40-year career. The annual retirement income was calculated using 4%, 5%, and 6% withdrawal rates from the final pension pot, then compared against the inflation-adjusted PLSA Retirement Living Standards for 2063.

Retirement Living Standards: The 2063 Targets

The Pensions and Lifetime Savings Association (PLSA) defines three retirement living standards for 2023, adjusted for 2% annual inflation over 40 years:

• Minimum: £27,380 per year.
• Moderate: £51,227 per year.
• Comfortable: £81,697 per year.

These figures highlight the rising cost of living and the challenges of achieving financial security in retirement.

Scenario Overview

We compared the following pension scenarios:

1. 8% Contribution (5% Growth): Current mandatory contributions with a 5% annual growth rate.
2. 12% Contribution (5% Growth): Increased contributions with the same 5% growth rate.
3. 8% Contribution (11.89% Growth - eurikah): eurikah’s high-performance pension scheme maintaining the minimum 8% contribution.

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Key Findings

• 8% Contribution (5% Growth):
  • Even with a 6% withdrawal rate, this scenario falls significantly short of the Minimum living standard, showing that current contributions and average growth are inadequate for retirement security.
• 12% Contribution (5% Growth):
  • Increasing contributions still fails to meet Moderate or Comfortable living standards, demonstrating the limitations of relying solely on higher contributions.
• eurikah Pension (8% Contribution, 11.89% Growth):
  • With superior performance, eurikah’s scheme delivers sufficient income to exceed the minimum standard across all withdrawal rates. At a 5% withdrawal rate, it also surpasses the moderate standard by 22.2% and provides the majority of income required to support a comfortable retirement.

Proof Performance Matters

This analysis shows that performance, not just contribution levels, is the key to achieving suitable retirement outcomes. In today’s economic climate, where affordability is a challenge for both employers and employees, a high-performance pension scheme like eurikah offers the most viable path to financial security in retirement.

Why Choose eurikah

At eurikah, we understand the unique challenges employers face. Our workplace pension scheme is designed to:

• Achieve Superior Outcomes: Outperform industry-standard schemes like NEST to help employees build adequate retirement savings.
• Reduce Financial Pressure: Deliver better results without requiring higher contributions from employers or employees.
• Enhance Workforce Well-Being: Enable employees to retire with confidence, reducing financial stress and increasing engagement.
• Simplify Pension Management: Offer a seamless, best-in-class service to minimize administrative overheads.

eurikah is more than just a pension scheme, it's a powerful tool for both businesses and employees. Designed specifically to support ambitious businesses and address to the UK pension crisis.

Take Action Today

The UK pension crisis demands bold action from employers. Increasing contributions alone won’t solve the problem—it’s time to prioritize performance.

By partnering with eurikah, you can provide your employees with the financial futures they deserve while positioning your business for long-term success.

Take the first step today. Contact eurikah to learn how our workplace pension scheme can deliver superior outcomes for your business and your employees.

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