Europe dominates retirement security as UK declines for fifth year in a row

Market volatility and soaring inflation has driven retirement security in the UK to its fifth consecutive year-on-year decline, according to Natixis Investment Managers.  

The Natixis 2022 Global Retirement Index also revealed that this is "the most challenging year to retire in recent history" with global retirement security under increased economic pressure.

The UK is now ranked 19^th out of the 44 countries compared for the annual study and recorded an overall score of 69% for 2022, down from 72% last year.

To rank countries, the index compares 18 performance indices within four thematic groups covering various aspects for measuring welfare in retirement. These are: the material means to live comfortably after retirement; access to quality financial services; access to good health services; and a safe environment.

The UK ranked highly for quality of life (seventh) but lower for the other key indices, with good health services and material wellbeing both declining since last year. The UK ranked 29^th out of 44 for material means to live comfortably.

Pressure on pensions

Covid-19 pressures saw the Bank of England place the rate to a 300-year low of 0.1% in March of 2020 with rates having only increased to 1.25% in June this year following the continuing effects of coronavirus on Europe's economy, and wider market volatility caused by the Russian invasion of Ukraine in February.

Natixis IM head of northern Europe Andrew Benton said the impact of inflation on pensions was exaggerating the ‘seesaw effect' that usually sees liabilities drop in inflationary times.

"The maths on inflation ultimately works out for the better for private pensions," he explained. "With inflation driving rates up and liabilities down, these managers generally see their contribution rate decline. On the public side of pensions, the maths may not be as advantageous."

Despite a challenging macro environment, this year's survey confirms the UK remained relatively consistent over the last decade of Natixis' research. Bank nonperforming loans, tax, pressure and governance were cited as the factors which drove the UK to a lower score in the finance index.  

Retirement and old age

Old age dependency is high across the globe including in the UK, with Natixis estimating this will skyrocket by 2050.

As a result of increased life expectancy, the Organisation for Economic Co-operation and Development projects the amount of over-65s globally will increase from 2019's figure of 17.3% to as high as 26% in the next three decades.

"This is where the math becomes most concerning for policymakers. A larger population that will live longer breaks the formula behind most ‘pay-as-you-go' retirement systems.

Natixis' old-age dependency ratio - which shows the number of retired people out of every 100 with a population - is set to rise from 32 to 47 by 2050.

Ten key retirement planning mistakes were outlined by the investment manager as part of its research for this year's index. These include: underestimating the impact of inflation; underestimating how long savers live; overestimating retirement income; being too conservative in investments; and setting unrealistic return expectations.

Natixis also pointed to forgetting to factor in healthcare costs, failing to understand income sources and relying too much on benefits as key mistakes.

Rounding out the list is underestimating real estate costs and being too aggressive with investments.

Benton said: "Getting retirement right and helping to ensure individuals can live with dignity after their working years is a core sustainability issue for society. Difficult decisions will have to be made as policymakers strive to reconcile balance sheets with commitments to public retirement and healthcare benefits.

"Success will require a concerted effort from not only policymakers, but employers, the financial services industry, and individuals. It all starts with understanding the risks."

Global spotlight

European dominated this year's rankings with Norway returning to the top position after four years in third place. Norway recorded a score of 91% - 12 percentage points higher than the UK. Switzerland, Iceland, Ireland, Luxembourg, the Netherlands, Denmark and the Czech Republic are also in the top ten.

Australia and New Zealand were the only non-European countries to make the top ten, in fifth and sixth respectively, while Ireland has seen the largest gain in the index rankings over the last decade, moving from 38^th to fourth.

Natixis noted that the top performers' rankings this year were "more consistent than in years past" when it came to ticking all four boxes for comparison.