The incomes of newly retired workers are expected to fall at a much more dramatic rate over the coming decades than previously anticipated, with research from LCP warning of a potential "ski slope of doom" and prompting calls for "urgent action" in light of this.

Analysis from the provider has suggested that the death of defined benefit (DB) pensions has been more rapid than expected, with the rise of defined contribution (DC) workplace pensions taking longer than anticipated to make a real impact.

In the report, LCP combined modelling of private sector salary-related pensions with estimates from the Pensions Policy Institute (PPI) on future defined contribution (DC) pensions to show the “dramatic change” expected over the coming years.

This revealed that men, who have in the past received the lion’s share of private sector salary-related pensions, will see their real incomes at retirement drop "dramatically", falling by around 20%, whilst women’s pensions will rise only slightly.

Indeed, the report predicted that whilst the pensions gender gap will continue to grow slightly over the next few years, after this, male pensions will fall “sharply” relative to earnings, whilst women’s pensions will grow slightly, mainly because of improvements in state pensions.

Despite progress in the pensions gender gap, however, LCP highlighted the central role that the state pension is expected to play in future, particularly for women, where it is expected to make up, on average, more than four fifths of their income.

Considering this, it emphasised that all of the net growth in women's incomes by the mid-2040s can be attributed to a rise in the real value of the state pensions they will receive, stating that, without this, women's overall incomes would make no progress in the next quarter of a century.

More broadly, the report explained that the whilst there has been a working assumption that the historic legacy of DB pensions would "tide" savers over until new DC pension structures came to take their place, this was wrong for three reasons.

It stated that past modelling ‘lumped together’ around six million public servants, who were still building up good salary-related pensions, with tens of millions of private sector workers, the “large majority” of whom are not building up any salary-related pensions.

LCP also noted that figures showing how pensioners as a group are faring relative to workers have been an average over all pensioners, and have not focused just on those retiring today.

It stressed that that “not surprisingly” newly retired pensioners tend to be better off than elderly widows, in turn raising the overall average of pensioner incomes and “disguising” the fact that in future the newly retired will be getting steadily worse off.

Furthermore, it explained that whilst auto-enrolment has brought around 10 million extra workers into pension savings, these savings will take a very long time to be reflected in meaningful at retirement incomes.

The report also noted that the mandatory contribution only increased to 8% in 2019, meaning that it will be “decades” before the majority of newly retired pensioners have a meaningful pension based on that rate of contribution.

Commenting on the findings, LCP partner, Steve Webb, said: “We have been living in a fool’s paradise when it comes to incomes at retirement. For years, salary-related pensions from private sector jobs have supported the incomes of the newly retired, and men in particular.

“But these pensions are disappearing much more rapidly than we thought. And new-style workplace pensions are not being built up quickly enough to take up the slack. We need a step change in the urgency of pension reform.

“Unless urgent action is taken to increase the pace at which new pensions are being built up, a whole generation of people will retire on lower incomes than previous generations or will have to work longer before they can afford to retire”.

In particular, the report highlighted two key policy implications, including the importance of thinking carefully before undermining the state pension, which LCP argued will remain "essential" until DC is ready to take the strain.

In addition to this, the provider called for the building up further DC pensions, highlighting proposed reforms around auto-enrolment, such as reducing the qualifying age and qualifying earnings, as welcome, and stressing the need for "greater urgency" in driving forward such proposals.

It also outlined a number of "more radical" steps that may be needed, including "urgently" reviewing the adequacy of mandatory contribution rates, introducing automatic escalation, a review of the balance between employer and employee contributions, and a review of pension tax relief.

(This article first appeared on our sister title www.pensionsage.com.)

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