Pension savers told only more risk will beat low returns

Cautious retirees and pension funds shun stocks and shares, but their retirement pots will suffer, research shows.

Investors moving into safe assets to avoid the economic fallout of coronavirus will not make up lost returns and need to take more risk with their cash, a report says. 

The Mercer CFA Institute Global Pension Index 2020 compares 39 retirement income systems, covering almost two-thirds of the world’s population.

It scored UK pensions highly for savers’ trust that schemes will meet their obligations to provide a retirement income.

But for adequacy of returns and sustainability, UK pensions scored badly compared to other countries because pension schemes and savers are very cautious about where they invest.

UK pensions should increase access to growth assets, such as stocks and shares, the Mercer report argued, to “improve the sustainability of the system, support the economy, and increase the potential for achieving better outcomes for pension savers”.

Benoit Hudon, Mercer’s UK head of wealth, said:

“We believe too much focus has been put on security at the expense of adequacy and affordability, leaving pensions savers with low investment returns.”

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The pandemic “has put into sharp focus the flaws within the UK pensions system”, he said, adding that savers and schemes need “to rethink what represents an acceptable level of risk into our pension system”.

The widespread economic impact of Covid-19 is heightening the financial pressures that retirees face, both now and in the future, the research found.

These include reduced contributions, lower investment returns and higher government debt.

Other factors are increasing life expectancies and the rising pressure on public resources to support the health and welfare of ageing populations.

Employers’ part in both supporting the workforce and helping them accumulate and secure wealth, “is becoming increasingly important”, the report said.

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David Knox, lead author of the study, said the economic recession caused by the global health crisis will “inevitably impact future pensions, meaning some people will have to work longer, while others will have to settle for a lower standard of living in retirement”.

The long-term economic effects of Covid-19 are impacting industries, interest rates, investment returns and community confidence in the future. 

At the same time, the level of government debt has increased in many countries. That is likely to restrict how well governments can support their older residents in the future.

Gender inequality in pension provision is also expected to increase.

“Even before Covid-19 many women faced retirement with less savings than men, and that gap is expected to widen further in many pension systems, particularly in the hardest-hit sectors where women represent more than half the workforce, such as hospitality and food services,” said Knox.

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