Aegon Retirement Readiness Survey 2012

The 2012 Retirement Readiness Survey confirms that immediate action is required to address a general lack of retirement readiness. People have however started to recognize the essential role they play in their retirement security.

The research illustrates how rapidly the present shape of retirement has already begun to change. Pessimism is on the rise after years of turbulent global economic conditions. The research found that 71% of employees believe that future generations will be worse off in retirement than current retirees, reversing the long-established notion that each generation should help pave the way for future generations to enjoy a higher standard of living.

Ongoing economic uncertainties are clearly hastening the need to reappraise current practices, but amid the challenges, some positive sentiments are emerging with the consensus that a new blueprint for retirement will require greater flexibility in how people approach planning for their later years.

This changing environment of aging, coupled with pension strains, has led to greater awareness of personal responsibility for retirement savings. More than 70% acknowledge that they are now responsible for saving for their own retirement, but relatively few actually believe that they are on course to reach their desired level of income.

Key findings

Many employees plan to rely on government and employer-provided retirement benefits to provide sufficient retirement income to last their lifetime. However, 54% think it is "somewhat" or "very likely" that their employer will reduce workplace pension benefits. Additionally, the majority (62%) feel that their personal retirement savings are now worth less as a result of the financial crisis.

And many individuals indicate they plan to rely on the government for their primary income source in retirement; however, 74% acknowledge that government pension benefits will become less substantial due to cuts in government spending. only a small minority – some 12% of respondents – believe that the current level of government provisions will remain affordable into the future, suggesting there is now widespread public acknowledgement that further pension reforms are inevitable.

A major step identified by governments to improve the sustainability of current pension systems has been the promotion of longer working lives among today's generation of employees.

However, nearly half (47%) of all respondents feel that the retirement age should remain unchanged in spite of the need to offset increased longevity costs; a sentiment that is higher in Hungary (65%) and Poland (61%); and lower in the Netherlands (34%), the United Kingdom (36%) and the United States (32%).

Only 17% fully agree that the retirement age should increase because of longevity, while others consent to longer working years, but with qualifiers: 19% feel that the retirement age should increase to match increases in life expectancy, albeit with an exception for employees in dangerous or manual jobs, and 12% say the age should increase, but be capped.

Raising taxes or reducing benefits are other possible measures to help shore up deficits faced by current government retirement benefit systems. Facing this difficult set of options, many (42%) prefer a balanced approach of some reductions in benefits and some increases in taxes, and others (27%) prefer just tax increases. this leads to the conclusion that over two-thirds (69%) favor some form of tax increase as a solution to finance government retirement benefits.

While the responses across countries are generally similar regarding some form of tax increase, Hungary (51%) and the United Kingdom (51%) have the highest support for a balanced approach, compared to Sweden (38%) with the highest support for increasing taxes without reducing benefits.

Alongside this endorsement of higher taxes to pay for government retirement benefits, strong support remains for the role of the government in providing for retirement, with 78% agreeing that the government should continue to fund retirement benefits. However, most respondents also believe that a balanced approach to retirement provision is necessary, with 73% agreeing that employers, individuals and the government should all play an equal role.

Looking beyond the need for pension reform, employees are already changing their expectations for their transition into retirement. what is known as the "retirement cliff" – the point when an employee ends his or her working life and enters full-time retirement – is becoming a thing of the past. Increasingly, retirement is a phased transition from full-time working to partial retirement that still involves some type of work-related activity.

Whereas a majority (54%) of the current generation of retirees moved straight from working life into full retirement, the majority of current employees (60%) expect to keep working in some manner beyond their retirement age. US employees are leading this trend, with only 18% expecting to stop working immediately when they reach retirement age.

Even amid the global economic gloom and changing expectations, Aegon's research shows people are still holding on to positive aspirations for life in retirement. Spending more time traveling is the most popular ambition among all countries in the survey: 68% would like to travel more in retirement, with the highest at 78% in Poland. one-in-six would like to retire to another country, proving most popular with Swedish (31%) and British (21%) respondents.

This evolving vision of retirement not only signals an end to the traditional "retirement cliff" it also offers opportunities of working longer or working part-time to help close gaps in income, stay active and maintain social networks while still contributing to society. "Silver entrepreneurs" could become more common as more people combine projects like starting their own businesses with travel and leisure pursuits during retirement.

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Recommendations

Individuals need to continue to increase their awareness of the challenges and opportunities of increased longevity. there needs to be a better understanding of the amount of retirement savings needed and how to make those savings last their lifetime. People need to better understand expected retirement benefits from the government and their employers, as well as any additional savings needed to ensure their retirement security.

Individuals must also begin to consider other actions needed to ensure their retirement security. Individuals should be encouraged to remain economically active past the traditional retirement age – through phased retirement, working longer or other methods. A substantial number of respondents have already reached this conclusion – 69% of employees say that it is now likely that they will work longer to provide their desired income in retirement.

Future retirees should start to save, and save regularly. the survey findings demonstrate that 86% of non-savers and 88% of aspiring savers have a low ArrI score. this low readiness score improves dramatically to 53% when examining those who take at least occasional savings actions. A major difference exists between those who save occasionally, of whom 3% achieve a high ArrI score, and those who consider themselves to be habitual savers, 17% of whom have a high index score. this represents a six-fold increase in those with a high level of retirement readiness.

Finally, individuals should take action to ensure their retirement benefits and savings are protected during their working years, and have a plan in place to ensure that their retirement savings last their lifetime.

Education and meaningful financial information are central to financial and retirement security. Individuals should be aware of, and have access to, the tools and information they need to make good financial decisions.

The proper tools and education will help provide a basic understanding of how to save, how to manage savings to last a lifetime, how personal financial products supplement government and employer retirement benefits, and how to protect individuals and their families in the event of prolonged illness or death. Such a basic understanding is essential to achieving effective financial security.

For many individuals, the workplace is the key source of such tools and information. Many of the most important motivations to save are work-related, such as getting a job, receiving a pay-raise or a promotion and enrolling in a workplace retirement plan.

Employers are encouraged to educate employees about all of their workplace benefit plans. Government policies can facilitate the ability of employers to provide such tools and information. Governments could also consider promoting tools aimed at giving a combined, global overview of an individual's retirement saving (e.g. showing government benefits, workplace retirement benefits and even any retirement savings outside the workplace).

Finally, governments can stimulate financial awareness at an earlier stage by promoting financial education in schools.

Where different providers and/or benefits are available in the workplace, employees must have the necessary information so that the choices and benefits they offer are transparent. employers should expand participation by automatically enrolling participants in workplace plans, and should seek to increase the amount of savings contributions through auto escalation. employees should also be permitted to purchase products within workplace plans that provide a lifetime income stream and to be able to receive distributions from workplace plans in the form of a guaranteed lifetime income stream.

In designing workplace retirement savings plans, consideration should be given to encouraging participation by women, lower-income employees, younger employees and seasonal and part-time employees, as well as addressing the needs of these groups who typically either do not have discretionary income or do not remain in one job for a sufficient length of time to be eligible for maximum benefits under the workplace plan.

In the United States, for example, a recent law enabled plans to provide for "catch-up contributions" for employees over the age of 50 who may be late entering the labor market. this is consistent with changes to the labor market itself to accommodate these employees. A number of governments have recognized that efforts to reform the labor market must play a central role in addressing the sustainability of pensions systems. The EU Pensions white Paper argues that, among other possible responses, there is considerable scope for improving future retirement incomes by raising employment rates among groups such as women, migrants and youths.

A greater level of retirement saving brings benefits not just for the individuals who are saving, but for society in general. Higher saving rates reduce the burden on taxpayers to fund the retirements of the elderly, and free up public money for the government to spend on other priorities. therefore, there is a clear interest for governments to provide incentives to save for retirement through the tax system, as is already the case in many of the countries surveyed. the most effective tax incentives for the long term are those which are easy to understand and easy to use, such as ISAs in the United Kingdom and 401(k) plans in the United States.

It is important to improve the availability of financial protection products and retirement savings opportunities, both through the workplace and individually. employers should be encouraged to offer retirement plans and other products that help employees build financial and retirement security, and governments should consider policies that make it easier for employers to offer workplace retirement plans and encourage employees to participate in those plans.

Innovations in financial and retirement security products should be encouraged to meet the changing face of retirement, while enhancing the simplification that is so important. Providing flexible retirement options which enable individuals to take responsibility for how they plan their retirement involves encouraging a broader market for financial products and financial advice.

Individuals should be provided protections in the purchase of retirement and financial security products, and be able to easily access information and advice about those products. they need access to sufficiently robust information to compare and make proper choices among different retirement savings products. this may mean ensuring that information about different products from different provider- types is based on a common terminology and metrics.

The decline of traditional defined benefit plans and the reduction of government retirement benefits increase the risk of outliving retirement savings. Individuals should be educated about the risks of various retirement savings products, including investment, inflation and interest-rate risks, as well as the risks of outliving the retirement savings. Individuals should also have access to guarantees regarding retirement savings products.

By offering protection against risks inherent in defined contribution plan through means such as: life cycle funds, auto enrollment, auto escalation, matching of contributions, and distribution of benefits in the form of a lifetime income, employers can help employees better prepare for retirement.

Government and workplace policies should increase awareness of challenges and benefits of increased longevity and the need for governments and employers to make retirement benefits more sustainable.

Focus should be placed on the benefits of pursuing an active retirement, and the possible need to keep working beyond traditional retirement age, as well as the need to increase personal savings. this research shows that a substantial group acknowledge that retirement ages need to rise. It also underlines the gap in many countries between the official retirement age (the age at which they can draw on their government pension), and their expected retirement age.

Governments could also seek to encourage behavioral changes in planning through tax breaks. expectations and attitudes toward traditional retirement can be driven by both governmental policies and workplace changes; but significant discussion of these changes are beyond the scope of this survey.

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