The annual income that a pension saver receives has been cut by nearly 80% in the last 10 years, according to new research.
Research by consultancy Watson Wyatt says that lower returns on investments mean that the pension pot after saving for 20 years is less than half what it would have been 10 years ago and annuity rates used to convert pension pots into income have also reduced by nearly half over the same period.
Once these two cuts are combined, the resulting income is down by 78%, for savings of identical amounts.
Stephen Yeo, a senior consultant at Watson Wyatt, said: Adair Turner’s main recommendation is that people should save for their own pension. What his report doesn’t highlight is the extent to which returns from savings can fluctuate.
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 that NPSS will provide pensions that are suitable for the vast bulk of savers who need the proceeds from NPSS in order to provide even a basic standard of living in retirement, Mr Yeo added.
If the government opts for a system where individuals bear all the investment and longevity risk there is a good chance that a significant number of them will end up with inadequate pensions, Mr Yeo fears.
The cost of pensions has risen due to lower investment returns and greater longevity. People saving for their own pension need to respond by saving more or working for longer.
Those who are lucky enough to have a defined benefit pension provided by their employer will not be affected, though the figures do shed light on why the cost of these type of pensions has risen so sharply. Unfortunately, private sector employers are now in sharp retreat from sharing any of the risks of providing pensions and the Pensions Commission’s recommendations will do little to arrest this trend, Mr Yeo concluded.