Will pension incomes in 40 years be as good as they are today?

10 September 2014

Pensions Minister Steve Webb says that the Department for Work and Pensions (DWP) predicts people's pension incomes will in the future be consistent with present earnings.

Many thanks to Professional Pensions for this report:

Explaining an unpublished graph from DWP, Steve Webb told an audience at the Institute of Fiscal Studies: "The bottom-line is: per week earnings stay pretty flat over the next 40 years."

In his speech, the minister shared his concern about whether or not "auto-enrolment will ride like the cavalry to the rescue in time for the death of defined benefit [DB]. Membership of DB has been falling since I was born. Decades long of fall are bound to show through in retirement. And it might be decades before [defined contribution (DC)] builds up to a worthwhile sum. Is there a chance of a gap generation; a hole in the middle?" he asked.

"But the good news is: there isn't", he said, illustrating his case with graphs of his department's projections for retirement income over the next 40 years. The figures - which have not been released to the public - predict retired people's earnings per week remain steady from 2014 to 2054, despite significant falls in the proportion of earnings constituted by DB pensions. "We see DC riding to the rescue, outpacing DB by the late 2030s," said Webb, explaining that DC pension schemes are on course to replace lost earnings, in concert with the "triple-locked single-tier state pension." From April 2016, a flat-rate state pension will come into effect, and the ‘triple lock' ensures the state pension currently rises each year by the highest of inflation, earnings or 2.5%.

Association of British Insurers director-general Otto Thoresen said: "There are a few assumptions in the data - for example the assumption that people won't be dipping into pots to pay off debts, etc."

The data projecting retired women's incomes over the next 40 years also revealed their retirement incomes to rise slightly, although they will not equal men's. "Men have hogged DB, so they lose most from its death, not women. Women are improving their earnings," Webb said.

"You might be mistaken for thinking we've had a progressive pensions minister," he joked. "It could almost have been by design. Everybody will also be happy in the future: that's my conclusion."