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COVID-19: A bump in the road for DC savers?

As the IFoA launches new work on saving for retirement, Catherine Burtle, IFoA Policy Manager, looks at how COVID-19 could be affecting savers’ ability to stay on track.

Catherine Burtle, IFoA Policy Manager

Crises necessitate short-term thinking. In a time of global uncertainty, choppy market conditions, and a dramatic wider economic outlook, it’s natural for companies, policymakers and households to consider how to navigate numerous near-term predicaments over investment in the future.

The difficulty many of us experience imagining the future, thinking about retirement for example, is made all the more challenging when it’s hard to even picture what next week will look like, let alone next year.

Navigating economic uncertainty does not, for many people, spark thoughts of the distant future. But the current crisis and resulting economic uncertainty is likely playing a real part in many people’s retirement prospects, whether they are actively engaging with that reality or not.

People who had hoped to retire in the near future may find that now is not a sensible time to so do. If they are lucky enough to have the option to defer retirement for a year or two, they may do so in hopes of riding out the near term economic uncertainty.

For those, like me, who will likely rely on DC provision to fund their retirement (albeit in 30+ years time), the short term hit to their pension fund will hopefully be just that: one of a number of bumps in a long road.

Younger generations of DC savers are likely to fall into one of two categories during the pandemic: those who have been furloughed, lost their jobs, or seen their hours reduced, and will be making reduced contributions to their pension fund, or those who have retained employment, but are spending less because of the lockdown restrictions, and may have an unusually pleasant bank balance at the end of the month.

For those in the first category who have been furloughed, the Government has taken steps to ensure their pension contributions continue to be paid. In response to a written question tabled in Parliament in June, the UK Pensions Minister reiterated:

Helping people save for their futures remains a key priority for Government, and employers are still required to comply with obligations under automatic enrolment to enrol employees into workplace pensions and then make contributions… By easing the burden of workplace pensions for employers, we are helping them better manage costs during the crisis whilst supporting long-term saving for the future.

In spite of this, people are probably setting less aside into the pension than they normally would. It would be understandable if people’s pensions were not their main financial priority right now; in some circumstances simply putting food on the table might be.

In a further attempt to ease people’s immediate financial stresses, the Government last month removed the charge for those wishing to withdraw money from a Lifetime ISA, a savings vehicle introduced in recent years to help people save for a house purchase or retirement.

But as the dust settles, longer term issues come into clearer view. Like many responses to the global pandemic, financial measures have been designed to help in the short term, but sooner or later, we will start to understand the longer-term impacts of this sort of policy.

All this acts as the backdrop to new analysis launched by the IFoA today, looking at the young generation of DC savers and their ability to stay on track with saving.

The paper we’re launching today is the first in a series of five papers following up on our Savings Goals for Retirement policy briefing. In that 2019 paper, we aimed to shed a light on the real cost of saving for a decent retirement for those relying solely on DC provisions. This paper, and the four that follow, will examine how the figures we talked about last year sit in the context of real saving habits and the wider pensions landscape. Paper 1 introduces a simple rule of thumb to help check whether you’re on track to meet your retirement expectations, again with reference to the PLSA’s Retirement Living Standards.

The sad reality is that for many people, the answer may be no. The IFoA remains concerned that a large proportion of the working population, particularly the ‘automatic enrolment generation’ of younger savers, are under-saving, and risk falling short of their retirement expectations. It is clear that COVID-19 will have impacted people’s ability to save more, positively or negatively. In either case, it is so important that individuals are doing the right thing for their long term interests, whilst acknowledging the immediate issues at hand.

In the remainder of this series we will explore a range of other rules of thumb that help people understand how their expectations for retirement match with their current saving habits, and crucially, how they might begin to make up any shortfall.

Read the paper