Lumera is active in the Nordic markets, the UK, Ireland, Benelux, and Central and Eastern Europe. These are amongst the most mature, and highly rated national insurance industries in the Mercer CFA Global Pensions Index for adequacy, sustainability and integrity. Lumera is by some distance the leading policy administration systems provider in the Nordic markets. This exposure and experience give us a particular and interesting perspective when we look at the UK market at a time when PwC predicts that, ‘A combination of societal, regulatory and technological change on an unprecedented scale is converging on the Life and Pensions sector in the UK.
In summary, we believe that any firm intending to innovate or comply will have to transform its underlying technology.
The savings gap and gender disparity indicate a huge underserved market
The UK suffers a severe and stubborn savings gap. The World Economic Forum (WEF) projects that the UK pension savings gap will rise from £6 trillion to £25 trillion by 2050. In a dramatic comparison, they say that the cost of providing security in retirement for a population likely to enjoy a life expectancy of more than 100, is the financial equivalent of climate change.
The UK has one of the widest gender disparities in the Organisation for Economic Cooperation and Development (OECD). For those aged 65 years and over, the median pension wealth for pensions in payment for men is double that for women. Gender disparity and the savings gap point to large underserved markets in the UK.
Pervasive indebtedness and portfolio careers make this opportunity difficult to address
During the second half of the twentieth century, financial institutions could rely on the vast majority of people following a simple trajectory of accumulation during their working lives and decumulation during retirement. For the current working population, Life and Pensions companies will be marketing to people with many small pension entitlements. These will almost certainly be inadequate to meet their expectations of retirement income.
Today, the relative income of people aged over 65 in the UK is almost ten percentage points below the OECD average: this is ameliorated by older people continuing to work, and the triple-lock, but will become more severe as the proportion of retired people covered by Defined Benefit (DB) policies decreases.
Working lives are becoming more complicated and less linear. During their productive years, as PwC has predicted, ‘All of us are likely to move to a portfolio career with periods of retraining and education.’ The Department for Work and Pensions (DWP) says people now have an average of eleven different jobs in their lifetime, potentially each with its own pension pot to keep track of. There is already an estimated £400 million in pension savings going unclaimed because people don’t know where they are, or how to access them, according to the Association of British Insurers (ABI).
The boundary between working life and retirement is also becoming increasingly complex. In the past four years, amongst people over 65, the UK, along with Norway, Sweden, the Netherlands and Germany, have seen increases in employment rates of over 10%, well above the OECD average. The Financial Conduct Authority’s (FCA) Financial Lives Survey in 2020 found that ‘The decision to access a pension is not strongly linked to retirement’, given that 36% of non-retirees aged 55+ had started to take income or cash lump sums from a pension; and 28% of retirees (of all ages) had not accessed a pension.
Also, the insurance industry is having to address a working-age population who are permanently indebted, even in their peak earning years. The Money Charity report that ‘People in the UK owed £1,767.1 billion at the end of January 2022, £63,582 per UK household.
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Auto-enrolment has increased participation without solving the savings gap
Auto-enrolment has dramatically increased participation rates reversing decades of decline in retirement savings. After 10 years of auto-enrolment, the participation rate has risen from 47% to 79%. In practice, however, auto-enrolment has broadened under-provision rather than materially improving the UK’s inadequate savings rate. This is because private pension participation remains very low, and participation among the self-employed has fallen off a cliff. Only 1 in 10 men and 1 in 16 women aged 16 years to State Pension age were actively contributing to a personal private pension from April 2016 to March 2018. Pension participation amongst the self-employed has dramatically decreased with only 16% of self-employed workers now saving into a private pension, down from just under half 20 years ago.