The Aegon Retirement Readiness Survey 2018

United Kingdom Country Report The New Social Contract: a blueprint for retirement in the 21st century The Aegon Retirement Readiness Survey 2018 The Aegon Retirement Readiness Survey 2018 1

Contents Introduction 3 Key Findings 4 The 2018 Survey Part 1: Megatrends and evidence of a crumbling social contract 5 Part 2: Improving individual retirement security the role of financial literacy and auto-enrollment 11 Part 3: Potential health issues loom large as retirement concerns 16 Part 4: Living and aging in good health and with dignity 19 Part 5: Forging the new social contract 21 Appendix 22 Note: Percentages are shown to zero decimal places. Rounding percentages to the nearest whole number may result in slight differences; for example, the percentages in some charts summing to slightly under or slightly over 100 percent. 2 The Aegon Retirement Readiness Survey 2018

Introduction The Aegon Center for Longevity and Retirement is pleased to present findings from its seventh annual Aegon Retirement Readiness Survey, The New Social Contract: a blueprint for retirement in the 21st century. This survey is the result of collaboration with nonprofits Transamerica Center for Retirement Studies (based in the U.S.) and Instituto de Longevidade Mongeral Aegon (based in Brazil). This report, while specific to the U.K., is based on research conducted in 15 countries spanning Europe, the Americas, Asia and Australia. Changes taking place in the U.K. and around the world are giving rise to new pressures on existing social contracts forged during the last century. This is forcing all of us to look differently at our plans for achieving good health and financial prosperity in later life. This report focuses on the responses of 1,000 people in the U.K. including 900 workers and 100 retirees. It investigates the stresses and pressures being put on the UK retirement system and the roles the government and employers are expected to perform. The report evaluates the retirement readiness of workers themselves and investigates improvements that can be made to help workers achieve the aspirations they hold for their retirement. It investigates the growing importance of health in the realities of financial planning, and for the first time the report examines the issue of ageing with dignity. With more people in the U.K. reaching their 80s, 90s, and 100s, issues around healthy ageing and financial security are becoming ever more pertinent. The idea of a social contract has been central to the way in which people in the U.K. plan and prepare for retirement. This contract was established between governments, employers and individual workers, setting forth their respective responsibilities. For decades, the U.K. has operated an enduring system of benefits and entitlements that has helped millions of people in the U.K. to achieve a secure and fulfilling retirement. However, when the U.K. retirement system was created in the 20th century, average life expectancy was far shorter than it is today. Even as recently as 1960, the life expectancy for the average person in the U.K. was 71 years 1, just a few years past the age the state pension could then be drawn: 65 years for men and 60 years for women. For many years, the state retirement age has remained constant at 65 for men, but in 1995 the government announced plans to slowly equalise the retirement age between genders, and as of 2018 it stands at 65 for both men and women. However, life expectancy is increasing in the U.K., standing now at 81 years as of 2016. 2 With the aim of keeping the state pension system fair and affordable, the government is set to increase the retirement age to 66 by 2020, and 67 by 2028. 3 Nevertheless, with people in the U.K. potentially spending a decade longer in retirement than previous generations, the existing retirement system is coming under increasing financial strain. As the findings throughout this report illustrate, it is time for a new social contract. 1 World Bank, Life Expectancy at birth, total (years) UK. 2017 2 Ibid 3 Department for Work and Pensions, State Pension age timetable. May 2014 The Aegon Retirement Readiness Survey 2018 3

Key Findings: The Aegon Retirement Readiness Index (ARRI) measures how prepared workers around the world feel for their retirement. The U.K achieves a medium ARRI score of 6.0, down from 6.2 last year. Although still towards the top-end of the country rankings, the U.K. falls slips from fifth place in 2017 to joint-sixth in 2018. Increased life expectancy and reductions in government retirement benefits (both 24 percent) are the key megatrends people in the U.K. say are impacting on their plans for retirement. For 22 percent, the prolonged low interest rate environment is impacting on their plans for retirement. Three-in-five (59 percent) of people in the U.K. think that future generations of retirees will be worse off in retirement than current retirees, ten percent more than the average globally (49 percent). Just nine percent of people in the U.K. think that future generations will be better off, while 22 percent think it will be about the same. U.K. workers expect the bulk (40 percent) of their retirement income to come from the government (compared to 46 percent globally). A third (34 percent) is expected to come from their employers (24 percent globally), and a quarter (26 percent) is expected to come from their own savings and investments (30 percent globally). Asked what action the government should take to address the growing cost of Social Security, the most common view held by people in the U.K. (39 percent) and globally (34 percent) is that the government should increase overall funding without having to reduce the value of individual payments. Nine percent take the opposing view, that the government should reduce costs by reducing the value of individual pension payments, and a further 30 percent take a balanced view of some reductions in individual payments and some increases in tax. Forty-five percent of workers in the U.K. are saving habitually for retirement (compared to 39 percent globally). A further 21 percent are only saving on an occasional basis. While 13 percent are not saving now but have done in the past, 16 percent are not currently saving but do intend to in the future, and five percent have never saved for retirement and never intend to. Twenty-eight percent correctly answer all of the Big Three Financial Literacy questions developed by Drs. Annamaria Lusardi and Olivia S. Mitchell in 2004 and used in this survey with their permission. This is in line with the global average (30 percent). Those that correctly answer all Big Three financial literacy questions achieve a higher ARRI score than those that do not (7.0 compared to 6.0 among all people in the U.K.). The majority of workers in the U.K. are open to the idea of automatic enrolment, with almost two-thirds (63 percent) finding the idea appealing (global: 57 percent). It is notable that appeal is only slightly higher in the U.K., as unlike other countries in the study, auto enrolment has already been fully enacted. One-in-five (21 percent) of people in the U.K. are confident that they will be able to afford their own healthcare in retirement, in line with the global average. Women (15 percent), and those currently in poor or fair health (13 percent) are among those least confident in their ability to afford their own healthcare in retirement. 4 The Aegon Retirement Readiness Survey 2018

Part 1: Megatrends and evidence of a crumbling social contract Globalization, innovation, advances in science and technology. Our world is changing rapidly amid these and other trends. Many of these trends are so impactful that they can be considered megatrends. Changes brought about by megatrends are already shaping societal constructs, how people lead their daily lives, plan for their future, and, ultimately, prepare for their retirement. People in the U.K. show slightly more sensitivity to the impact that the low interest rate environment is having on their retirement plans (22 percent vs. 20 percent globally). However people in the U.K. are less sensitive to all other global trends. In fact, almost three-inten (28 percent) of people in the U.K. say none of the global trends will have an impact on their plans for retirement, double the global average (14 percent) and higher than in any other country surveyed. While 38 percent globally say that reductions in retirement benefits will impact their plans for retirement, this falls to just 24 percent in the U.K. The introduction of the New State Pension in 2016 was set up to provide a flat-rate basic pension, with around three-quarters of the population set to be better off between 2017 and 2030 under the new scheme. However, this falls to only just over half of the population being better off under the new system by 2050, with three-quarters of those in their 20s and 30s currently set to be between 17,000-19,000 worse off in retirement. 4 With little difference in the amount of Millennials reporting that reductions in retirement benefits are impacting their plans for retirement (22 percent) and the U.K. average, there is potentially a disconnect between idealism and reality. As many people in the U.K. are concerned about the impact of increased life expectancies on their retirement plans (24 percent) as with reductions in retirement benefits, however levels here only fall just below the global average (27 percent). Life expectancy has swelled since the mid-20th century from 71 to 81 as of 2016. 5 With the state pension age only increasing marginally to 67 by 2028 from the 1995-decreed levels of 65 for men and women, the length of time individuals are living in retirement may be surpassing the duration they initially financially planned for. The third trend most likely to cause an impact on people in the U.K. s retirement plans come from a prolonged low interest rate. Over the past decade, the Bank of England has kept rates far below the pre-crisis level of 5.75 percent (July 2007): It was static at 0.5 percent from March 2009 until August 2016, where the Brexit vote triggered a lowering to 0.25 percent, to be reversed in November 2017 and raised again to 0.75 percent in August 2018. 6 Accordingly, this is a trend felt by many more Baby Boomers (33 percent) than Generation Xers and Millennials (both 14 percent), the former having greater market experience in a with higher interest rates, and which may have previously contributed to retirement saving accruals. 4 Department for Work & Pensions, Impact of New State Pension (nsp) on an Individual s Pension Entitlement Longer Term Effects of nsp. January 2016 5 Ibid, World Bank 6 Bank of England, Official Bank Rate history. October 2018 The Aegon Retirement Readiness Survey 2018 5

Chart 1 Reductions in government benefits and increased life expectancy are the most often cited global trends people in the U.K. see impacting their retirement plans 24% Reductions in government retirement benefits 38% Increased life expectancy Prolonged low interest rate environment 22% 20% Volatility in financial markets 17% 24% International political instability 10% 19% Changing demographics 9% 14% Changes in labor markets 8% 21% Terrorism 8% 11% New technologies and digital transformation 8% 12% Globalization Climate change Cybersecurity issues Urbanization 7% 6% 6% 9% 4% 8% 12% 12% 24% 27% Don't know None of the above 10% 13% 14% 28% United Kingdom Global Recognised or not, over the past 50 years, global megatrends, such as increasing lifespans, changing demographics, and more recently, the prolonged low interest rate environment, have impacted the way governments and corporations manage retirement systems and how social contracts operate. Continued change is inevitable, reshaping the contours of the retirement landscape in the U.K. for decades to come and influencing how future generations save, invest, plan and prepare for retirement. Despite relatively few people in the U.K. recognising the impact of these trends, it is a country of people who are predominantly pessimistic about the future of retirement. Almost three-in-five (59 percent) believe that future generations of retirees will be worse off than those currently in retirement, compared to 49 percent globally. Correspondingly, just nine percent of people in the U.K. think that future generations will be better off (compared to 18 percent globally). There is an amalgamation of causes that could be stirring such trepidation about the future of retirement in the U.K., from rising house and living costs causing younger generations to start saving later and less, ageing populations and the deterioration of defined benefit schemes as a standard for pension products. However, it is those closest to retirement who are most likely to feel future generations will be worse off, with 60 percent of Generation Xers and 65 percent of Baby Boomers reporting thus. Chart 2 Three-in-five people in the U.K. think future generations will be worse off in retirement United Kingdom 59% 22% 9% 11% Worse off About the same Better off Don t know Global 49% 24% 18% 9% 6 The Aegon Retirement Readiness Survey 2018

Amid concerns about potential reductions in government benefits, increased longevity, and changes in employment trends, the current social contract is crumbling. The U.K. retirement system represents a social contract that currently operates on a three-pillar approach. The three pillars Social Security (Pillar 1), workplace retirement benefits (Pillar 2) and personal savings (Pillar 3) are provided by the partners of the social contract the government, the employer and the worker, respectively. This contract was developed and proliferated throughout the twentieth century to help ensure that individuals were provided for financially in their old age. On trend with the global average, workers in the U.K. expect the bulk of their retirement income to come from the government, although a slightly smaller portion (40 percent compared to 46 percent globally). Instead, U.K. workers expect substantially more to come from their employer (34 percent) than the average globally (24 percent), and less of their retirement income to come from their own savings and investments (26 percent; 30 percent globally). The U.K. benefits from having auto enrolment into pension savings fully rolled out for employees, causing the portion of retirement income sourced from their employer to be notably higher than other countries in the study. Expected portion sizes from each of the three pillars vary between different personal income levels, however. While U.K. workers with high personal incomes expect a quarter (25 percent) and those with middle incomes a third (35 percent) of their retirement income to come from the Government, the larger low income group expect almost half of their retirement income (47 percent) to be funded by the state. People in the low income group are likely to have amassed less in both personal savings, and their employers will naturally contribute less to their pension as it is done by percentage of earnings. The question is, with all these pressures on the system, how do people in the U.K. of all income levels expect the Government to sustain this level of funding? Chart 3 People in the U.K. expect two-fifths of their retirement income to come from the government 30% 26% 23% 26% 34% Own savings & investments Employer Government 24% 34% 30% 39% 41% 46% 40% 47% 35% 25% Global United Kingdom U.K. (Low Personal income) U.K. (Medium Personal income) U.K. (High Personal income) The role of the government under growing pressure For years, experts have expressed concerns about the sustainability of pay-as-you-go Social Security systems. These systems are designed such that today s workers are contributing and paying for the benefits of today s retirees. Due to increases in longevity and lower fertility rates, populations are ageing with retirees living longer than this system was initially designed for compounded with a smaller portion of current workers paying into the system. The U.K. is no exception: the Office for National Statistics projects the U.K. population to grow from 66 million in 2016 to 76 million by 2046. And, as life expectancies extend and if fertility continues to stagnate, the proportion of the population aged 65 and older is expected to swell from 18 percent in 2016 to 25 percent by 2046, placing ever more strain on the government to provide support. 7 Asked what measures the government should undertake to address the growing cost of government pensions, the consensus in the U.K. is that some form of action is necessary. The most common view is that the value of retirement payments should stay the same and that taxes should be increased to fund this (39 percent). Opposingly, just nine percent of people in the U.K. take the view instead that the overall cost of Social Security provision should be reduced, therefore alleviating the need to increase taxes. Between these two positions, a further 30 percent believe that a balanced approach needs to be taken, with some reductions in individual payments but also conceding that there will need to be some increases in tax. 7 Office for National Statistics, Overview of the UK population: July 2017. 2017 The Aegon Retirement Readiness Survey 2018 7

Chart 4 Two-in-five people in the U.K. think the government should increase Social Security funding through raising taxes without having to reduce individual payments The Government should increase overall funding available for Social Security through raising taxes without having to reduce the value of individual payments 34% 39% The Government should take a balanced approach with some reductions in individual payments and some increases in tax 26% 30% The Government should reduce the overall cost of Social Security provision by reducing the value of individual pension payments, without having to increase tax 9% 16% The Government should not do anything. Social Security provision will remain perfectly affordable in the future 6% 7% Don't know 17% 18% United Kingdom Global Changes in employment and the impact on employer benefits As well as creating uncertainty about the future of funding Social Security, many of the megatrends discussed earlier in this section have also led to changing employment arrangements and employer benefit offerings. This then leads to uncertainty about the role played by employers in helping workers prepare for retirement. It is increasingly common for workers to change employers several times over their careers, and possibly become self-employed at one time or another. Traditional defined benefit plans, which were designed to fund the retirement of long-service workers at a time of a then-shorter life expectancy, are disappearing from the private sector retirement landscape. Instead, employers globally are shifting to offering defined contribution plans, in which employers are not only expecting workers to self-fund a greater portion of their future retirement income, but also to bear more investment risk. U.K. workers (57 percent) can work past the normal retirement age, compared to less than half globally (47 percent). A quarter (26 percent) of U.K. workers say that they have access to a phased retirement, and the same proportion again (26 percent) have access to a retirement plan without employer contributions (global: 29 percent and 27 percent respectively). The U.K. government began rolling out auto enrolment in April 2012, with staging dates gradually increasing coverage up until February 2018. Workers aged 22 to state pension age with an annual income of over 10,000, are as a default placed into their workplace pension scheme, although workers do have the option to opt out. Almost seven-in-ten (68) percent of workers in the U.K. say that they have access to retirement plans with employer contributions from their employer, rising from 60 percent in 2014 when the question was introduced. Unsurprisingly, given the lack of auto enrolment schemes globally, the U.K. s access to these plans far exceeds the global average of 43 percent. Almost three-in-five 8 The Aegon Retirement Readiness Survey 2018

Chart 5 Two-thirds of U.K. workers have access to a retirement plan with employer contributions, far surpassing global average United Kingdom Global Vacation/ paid time off 82% 77% Basic salary 82% 79% Convenient location of workplace 72% 67% Retirement plan with employer contributions 68% 43% Ability to work past the normal retirement age 57% 47% Flexible working hours 55% 49% Opportunities for career progression 51% 51% Access to good training provision 50% 47% Overtime and bonus pay 45% 54% Life insurance 31% 40% Phased retirement or other employer programs providing for a transition into retirement 26% 29% Retirement plan without employer contributions 26% 27% Stock purchase plan 22% 21% Medical health insurance 20% 57% Aegon Retirement Readiness Index and the role of individuals The role the individual takes in retirement preparation is gradually increasing but has further to go. The Aegon Retirement Readiness Survey (now in its seventh year) measures the level of retirement planning workers undertake as responsibility gradually shifts towards the individual. The Aegon Retirement Readiness Index (ARRI) provides an annual score based on responses to six separate questions: three broadly attitudinal (Questions 1, 2, 3) and three broadly behavioral (Questions 4, 5, 6). These questions are illustrated in the diagram below. What factors shape the ARRI score? Income replacement Do you think you will achieve the level of income 6 1 Personal responsibility To what extent do you feel personally you think you will need in retirement? responsible for making sure that you will have sufficient income in retirement? Financial preparedness Thinking about how much you are putting 5 2 Level of awareness How would you rate your level of awareness aside to fund your retirement, are you saving enough? on the need to plan financially for your retirement? Retirement planning Thinking about your own personal retirement planning 4 3 Financial understanding How able are you to understand financial matters process, how well developed would you say that your personal retirement plans currently are? when it comes to planning for your retirement? The Aegon Retirement Readiness Survey 2018 9

The ARRI ranks retirement readiness on a scale from 0 to 10. A high index score is between 8 and 10, a medium score between 6 and 7.9, and a low score is one that falls below 6. (For additional information about the ARRI and its methodology, please see Appendix 1 on page 22). With an ARRI score of 6.0, the U.K. just achieves a medium score by the smallest of margins. The U.K. s ARRI score has fallen since 2017 (6.2) and the U.K. slides from 5th place in 2017 to joint 6th in 2018. The U.K. has more ARRI high scorers than the global average (23 percent vs. 19 percent), and fewer individuals with medium scores (26 percent vs. 30 percent). Still, half (51 percent) of U.K. workers have a low ARRI score, in line with the global average. Chart 6 The U.K. places joint-sixth in retirement readiness 7.3 5.9 4.7 5.1 5.3 5.4 5.5 5.5 5.7 5.9 6.0 6.0 6.1 6.5 6.6 6.7 Total Japan Spain ARRI score (per country) Hungary France Poland Turkey Netherlands Australia United Kingdom Canada Germany Unitied States Brazil China India 10 The Aegon Retirement Readiness Survey 2018

Part 2 Improving individual retirement security the role of financial literacy and autoenrollment People in the U.K. generally have a positive outlook on retirement. Seven-in-ten (70 percent) associate retirement with positive words such as freedom, opportunity, and leisure, in line with the global average (68 percent). There are fewer negative associations of retirement in the UK, with just 43 percent of people associating the period with words such as poverty, insecurity, and loneliness, compared to 50 percent globally. This positive mindset can be seen in the retirement aspirations held by people in the U.K.: over half aspire to travel (56 percent) and almost the same proportion (55 percent) aspire to spend more time with family and friends. Chart 7 Travelling and spending more time with friends and family tops the list of retirement aspirations Traveling Spending more time with friends and family 45% Pursuing new hobbies 50% 22% Volunteer work 27% Living abroad 12% 14% 14% Continue working in the same field 15% 9% Continue working, but in another field 11% 9% Studying 12% 7% Starting a business 10% 24% NET: Business/ paid work 25% 56% 55% 57% 63% Don't know 3% 4% United Kingdom None of the above 3% 5% Global Over the years, the survey consistently finds that saving on a regular basis is the best route to retirement readiness. The Pensions Acts of 2008 and 2011 introduced automatic enrolment, making use of learnings from behavioral economics to effectively take the decision to save for retirement out of the hands of individuals. Workers are automatically enrolled into an employer plan and start saving a portion of their salary, and they only need to take action if they choose not to save. Forty-five percent of U.K. workers say they are saving for retirement on a habitual basis, which is only a five percent upturn on the survey figures from 2012, the year the auto enrolment rollout began. There are a number of factors contributing to the 55 percent of U.K. workers not saving habitually for retirement, despite auto enrolment now being fully deployed in the U.K. The Aegon Retirement Readiness Survey 2018 11

1. Cognitive factors: It is likely that the automatic nature of auto enrolment, coupled with the fact that income is taken at source, means that workers may simply not register or consider themselves to be saving for retirement (while contribution rates are low there is likely to be at least, for some, an out of sight, out of mind attitude to auto enrolment). 2. Opt-outs: Research from the Department of Work and Pensions (DWP) suggests that nine percent of automatically enrolled workers in 2016/17 choose to opt-out of the plan. 8 And with individual mandatory contributions having been increased from one percent of gross salary at the time the DWP report was written to three percent in 2018, and set to rise again to five percent in 2019, the number of scheme opt-outs may prove likely to increase. 3. Coverage: A small proportion of workers do not qualify for auto enrolment based on their age and income not meeting the opt in criteria. Our data shows that 11 percent of workers earn less than the 10,000 minimal earnings criteria and therefore would not be automatically enrolled (although those earning between 6,032 and 10,000 are not automatically enrolled, they do have the right to opt in). Four percent of workers are aged under 22 years and would therefore not be automatically enrolled (but again, so long as they earn over 6,032 per annum, they do have the right to opt in to the scheme). Workers aged over the State Pension age will not be automatically enrolled by their employer either. Auto-enrolment is designed to take the choice element around long-term savings away from workers to help prevent human nature (e.g. hesitation or procrastination) hampering the saving efforts of younger workers, to start them saving earlier to expose them to the benefits cumulative interest has on longterm savings. Workers over the State Pension age will have already taken this decision and either already have a workplace pension set up or have decided not to save. Workers aged between the State Pension age and 74 do have the right to opt in. Automatic enrolment does not apply at all to workers aged 75 and over. The tax benefits of saving into a pension scheme stop at age 75. It is also worth noting that auto enrolment also does not cover self-employed individuals (not covered in the survey sample). It should be noted however that the majority of people in the U.K. (66 percent) are currently saving for retirement, albeit not all of them doing so habitually. One-in-five workers in the U.K. (21 percent) say they are saving for retirement, but only on an occasional basis. However, a third of the population are not saving for retirement: 13 percent are not saving but have done in the past; 16 percent aren t saving but do intend to do so; and five percent have never saved and have no intention to do so. Chart 8 Almost half of U.K. workers are habitual savers United Kingdom 45% 21% 13% 16% 5% Global 39% 24% 12% 19% 6% Habitual savers - I always make sure that I am saving for retirement Occasional savers - I only save for retirement occasionally from time to time Past savers - I am not saving for retirement now, although I have in the past Aspiring savers - I am not saving for retirement though I do intend to Non-savers - I have never saved for retirement and don t intend to As well as putting money aside for retirement, a certain amount of planning is required to make sure that aspirations can be fulfilled in retirement, such as the ones people in the U.K. identified in Chart 7. The study finds that over half (53 percent) of U.K. workers already have a plan in place for retirement, including eleven percent who have committed this plan to writing ( retirement strategists ). This falls slightly short of the global average, where 58 percent have a plan, including 13 percent with theirs in writing. The act of considering one s future finances and committing a plan to writing formalizes the process, thereby increasing the likelihood of success. 8 Department for Work & Pensions, Employers Pension Provision Survey 2017. June 2018 12 The Aegon Retirement Readiness Survey 2018

Chart 9 One-in-nine workers in the U.K. are retirement strategists United Kingdom 11% 42% 43% 4% Global 13% 44% 38% 4% I have a written plan I have a plan, but it is not written down I do not have a plan Don t know Saving habitually and setting forth a written financial plan for retirement can help workers in the U.K. achieve their retirement aspirations. But do they have the knowledge to make what can be very important and detailed financial decisions? Equipping individuals with the tools to better plan for retirement Pressure on the social contract means that ever more responsibility is falling into the hands of individuals, and away from the experts be it ensuring a sizeable state pension from their retirement plans to the growing prominence of robo-advisers and robo-investors for savings advise in place of a typical high street financial adviser. People are increasingly asked to navigate through many different financial concepts, many of which require a detailed level of understanding. With their permission, the survey uses a framework developed by Drs. Annamaria Lusardi and Olivia S. Mitchell dating back to 2004, to measure financial literacy. Lusardi and Mitchell created the Big Three questions that measure understanding of compounding interest, inflation, and risk diversification. Their questions test respondents actual knowledge of these three topics, rather than their selfreported knowledge. The questions, along with the correct answers, can be found in Appendix 2 (page 23). Respondents in the U.K. broadly performed in line with the global average in terms of their financial literacy. Almost four-in-five correctly answered the compound interest question (78 percent in the U.K.; 75 percent globally), 64 percent correctly answered the inflation question (63 percent globally) while 38 percent correctly answered the risk diversification question (45 percent globally). Overall, almost three-in-ten people in the U.K. (28 percent) correctly answered all of the Big Three financial literacy questions (30 percent globally). Chart 10 Almost three-in-ten people in the U.K. correctly answer all 3 financial literacy questions United Kingdom Global FL1. The compound interest question % answering correctly 78% 75% FL2. The inflation question - % answering correctly 64% 63% FL3. Risk diversification question - % answering correctly 38% 45% FL1. + FL2. + FL3. - % answering all Big Three financial literacy questions correctly 28% 30% The Aegon Retirement Readiness Survey 2018 13

Without the requisite level of financial knowledge, it is impossible for people to formulate good retirement plans, or even know what questions to ask of advisors and retirement plan providers when seeking advice. Low financial literacy may also translate into failure to engage in any kind of retirement planning. Low levels of financial literacy are concentrated among certain groups. While 28 percent of people in the U.K. correctly answer all three financial literacy questions, this falls to 22 percent among both those educated below undergraduate level and those with a low personal income. For women and Millennials, however, even fewer correctly answer the Big Three questions (18 percent and 12 percent respectively). There is clearly work to be done in terms of improving financial education in the U.K., particularly in a way that will target these groups. Chart 11 Less than a fifth of women and one-in-eight Millennials are financially literate 39% 42% 37% 71% 35% 42% 28% 25% 22% 22% 18% 12% 1979-2000 1966-1979 1947-1965 United Kingdom Men Women Millennials Generation X Correctly answer all Big Three financial literacy questions Baby Boomers Less than degree educated Undergraduate degree or above Low personal income Medium personal income High personal income On the other hand, those who correctly answer all Big Three financial literacy questions (thus showing a higher degree of financial literacy) demonstrate better behaviours in terms of their retirement planning. They score higher on the ARRI (7.0 vs. 6.0 overall), are much more likely to be saving habitually for retirement (55 percent do so vs. 45 percent overall), and a higher proportion hold a plan for retirement either in writing or unwritten (67 percent vs. 53 percent overall). More workers in the U.K. who correctly answer all Big Three financial literacy questions feel they understand financial matters around retirement (77 percent do so vs. 58 percent overall) and similarly more are likely to know the value of their retirement savings (76 percent vs 58 percent overall). Chart 12 Those with greater financial literacy tend to be better prepared for retirement U.K. Workers (Total) U.K. Financially Literate Workers (Correctly answer all Big Three Financial Literacy questions) ARRI score 6.0 7.0 Habitual savers 45% 55% Those with a retirement plan (either written or unwritten) 53% 67% Able to understand financial matters when it comes to planning for retirement 58% 77% I have a very good idea of the total value of all my personal retirement savings and investments. 58% 76% In a world in which workers are expected to exercise more choice over how much they put aside for retirement, and how those retirement savings are invested, it is imperative to increase financial literacy among adults. Furthermore, there is a distinct need to provide more financial education, starting at an early age, so children can gain these vital skills that will serve them throughout their lives. 14 The Aegon Retirement Readiness Survey 2018

The lack of widespread financial literacy is alarming. Addressing it should be a top priority for policymakers, educators, retirement benefit providers, and other social institutions alike. Changing infrastructure to make it easier for individuals to save The strained social contract is forcing people to fund a greater portion of their retirement for themselves. Auto enrolment, now fully rolled out in the U.K., finds strong support among U.K. workers where 63 percent finding the idea appealing. When auto enrolment was introduced in the U.K. in 2012, initial mandatory contribution rates from both employer and worker were just one percent of the individual s gross salary. This low level helped to ease workers into the process of putting money aside at-source for retirement, familarising and normalising the system. However, contributions at these levels would not be produce a pension pot capable of supporting an individual through their retirement. Indeed, recent Aegon analysis found people on average earnings will need a pension pot of 301,500 to maintain their current lifestyle in retirement, based on the government s suggestion of a target replacement income 9, 10 of two-thirds of an individual s working age income. Accordingly, to boost pot sizes, the government is automatically increasing the minimum contribution rates through a process of auto escalation. Contribution rates rose to five percent of employees salaries in April 2018 (three percent from workers and two percent from their employers) and will increase to 8 percent by April 2019 (five percent contributed by the worker and three percent by the employer). 11 The good news is that the average contribution rate workers in the U.K. consider appropriate to be deducted from their salary is 7.0 percent, not far short of the global average (7.5 percent), and more than the upcoming five percent that will be required as of April 2019. However, a review by the Pensions Institute in 2014 recommended that contributions be increased to 15 percent to avoid future pensioner poverty. 12 The survey worryingly finds that just under half (48 percent) of U.K. workers say that they would be likely to use a feature in which their employer automatically increase their contribution rate to a plan by a certain percentage each year (compared to 47 percent globally) meaning that half of U.K. workers would not be keen on automatically sacrificing more of their salary year-on-year, as is underway at present. The danger is that auto escalation brings contributions to a more conspicuous level, where they reach a tipping point and workers respond by opting out of the system. This is most pertinent among different earning levels. While 62 percent of those with high personal incomes would likely use an auto-escalating pension, this falls to 51 percent of middle income earners and 44 percent of low income earners. For the latter, having money in the here-and-now can be a more powerful demand on finances than stashing for the future, especially if putting money aside feels unaffordable. Chart 13a More than three-in-five workers in the U.K. find the idea of auto-enrolment appealing United Kingdom 63% Global 57% Chart 13b Less than half of U.K. workers would be likely to use an auto-escalating feature in a retirement plan 62% 57% 48% 53% 44% 52% 53% 41% 48% 51% 44% 51% 1979-2000 1966-1979 1947-1965 Global United Kingdom Men Very or somewhat appealing Women Millennials Generation X Baby Boomers Less than degree educated Undergraduate degree or above Low personal income Medium personal income High personal income 9 Aegon, 300,000 pension pot required to maintain lifestyle. January 2018 10 Department for Work & Pensions, Automatic Enrolment Review 2017: Analytical Report. December 2017 11 The Pensions Regulator, Increase of automatic enrolment contributions (Accessed October 2018) 12 Pensions Institute, Independent Review of Retirement Income: Summary. March 2016 The Aegon Retirement Readiness Survey 2018 15

Part 3 Potential health issues loom large as retirement concerns As seen in Part 2, people in the U.K. generally hold positive associations with retirement, but naturally the ageing process is not without worries. Declining physical health (47 percent) and running out of money (43 percent) top the list of retirement concerns in the U.K. People in the U.K. show a heightened level of concern about getting Alzheimer s or dementia (40 percent vs. 33 percent globally), not being able to do the things they enjoy (36 percent vs. 31 percent globally) and losing their independence (35 percent vs. 28 percent globally). Chart 14 Declining physical health and running out of money top the list of U.K. retirement concerns Declining physical health Running out of money Getting Alzheimer's or dementia Not being able to do the things I enjoy Losing my independence Not being able to stay active Being alone and isolated Needing assistance with basic activities (e.g., bathing, dressing, meal preparation etc.) Needing to move to a nursing home Facing mental health issues (e.g., depression) Losing sense of purpose after stopping work Lacking social engagement Not having a daily routine 13% 15% 20% 18% 18% 19% 26% 23% 23% 22% 28% 29% 26% 27% 28% 31% 33% 36% 35% 35% 34% 40% 41% 47% 49% 43% Don't know None of the above 4% 3% 5% 6% United Kingdom Global Worries around the affordability of retirement are brought to reality in the study s finding that half of fully-retired people in the U.K. retired sooner than they had planned to (compared to just 39 percent globally), with unemployment (42 percent) and ill health (20 percent) the key reasons for people exiting the workplace prematurely. Financially, working up to or beyond the planned retirement age brings a two-fold advantage: the ability to continue saving and deferring the need to draw down savings. It also helps keep older people more active and more socially engaged. 16 The Aegon Retirement Readiness Survey 2018

Chart 15 Half of U.K. retirees retired sooner than planned United Kingdom 16% 32% 50% 3% Global 12% 48% 39% 1% I retired later than I had planned to I retired at the age I had planned to I retired sooner than I had planned to Don't know/ can't recall In terms of keeping themselves in the optimal position to stay in the workplace for their preferred duration, the good news is that people in the U.K. are a health-conscious group. Three-in-five (60 percent) people in the U.K. eat healthily (e.g. five-a-day portions of fruit and vegetables), over half exercise regularly (54 percent) and avoid harmful behaviours such as drinking too much alcohol or smoking tobacco (52 percent). Although more than two-in-five (43 percent) think about their long-term health when making lifestyle choices (for example by avoiding stress), people in the U.K. fall well below the global average in terms of taking their health seriously by having routine medical check-ups and doing regular self-checks (34 percent vs. 44 percent). Chart 16 The majority of people in the U.K. eat healthily, exercise regularly and avoid harmful behaviours I eat healthily (e.g., five-a-day portions of fruit and vegetables) I exercise regularly I avoid harmful behaviors (e.g., drinking too much alcohol or smoking tobacco) I think about my long-term health when making lifestyle choices. For example, I try to avoid stress I take my health seriously (e.g., have routine medical check-ups and do regular self-checks) 34% 43% 45% 44% 54% 51% 60% 56% 52% 58% I practice mindfulness regularly (e.g., meditation and relaxation exercises) 15% 19% Don't know / prefer not to answer None of the above 1% 1% 7% 6% United Kingdom Global Just as forming good financial habits early on in life can help individuals achieve a secure retirement, forming good health habits early can help workers maintain good health into retirement. Here, employers can play an important role by offering workplace health and wellness programmes. Four-in-five (82 percent) U.K. workers would be interested in at least one health and wellness programme, if their employer were to offer them. Healthy food or snack options at the office (40 percent), exercise programmes (35 percent) and health risk assessments (33 percent) top the list of favoured schemes. On the whole, however, interest in employer-offered programmes amongst workers in the U.K. is lower than the study finds globally. In particular, U.K. workers show a noticeable disinterest in ergonomic workstations (18 percent compared to 29 percent globally) and corporate-sponsored events (17 percent compared to 27 percent globally). The Aegon Retirement Readiness Survey 2018 17

Chart 17 Two-in-five U.K. workers would be interested in healthy snacks at the workplace and a third would be interested in employer-offered exercise programmes Healthy food or snack options at the office Exercise programs either on-site or discounts for local gyms Health risk assessment 33% 30% 35% 40% 41% 40% Preventative screenings and vaccinations Financial incentives for focusing on your health and wellness On-site health clinic available for routine visits Tools to monitor health goals/biometrics (e.g., BMI/weight loss, cholesterol levels, blood pressure) Programs, counseling or therapies to help with mental health issues A wellness coach to offer guidance and encouragement to help you achieve your health-related goals Ergonomic workstations (e.g., standing desks, adjustable workspace furniture) Corporate-sponsored events (e.g., walks, runs, bicycle races) An app that can help you set wellness goals, measure progress and access information Education on healthy behaviors (e.g., newsletters, e-mail communications, lunchtime lectures) Contests and opportunities to win prizes for health-related activities 15% 17% 16% 16% 19% 24% 19% 24% 18% 19% 20% 22 % 26% 26% 28% 27% 30% 30% 29% 31% 35% 35% Programs to stop smoking 9% 15% Programs for substance or alcohol abuse 7% 10% Don't know 4% 4% None 9% 14% United Kingdom Global 18 The Aegon Retirement Readiness Survey 2018

Part 4: Living and aging in good health and with dignity As covered in Part 3, health and money top the list of retirement-related concerns and around the world. No doubt, the cost of healthcare in retirement is likely to be a significant factor fuelling these concerns. Just one-in-five people globally say they are very or extremely confident that they will be able to afford their own healthcare in retirement. There is often an assumption in the U.K. (which has an extensive public healthcare system) that people can leave their healthcare to the state. But in practice, the nature of public healthcare means universal coverage and immediate care can be patchy. Not only is there a postcode lottery as to which different NHS Trusts provide access to different services and treatments, but devolution means the healthcare provision varies depending on which of the four home nations an individual lives in. This is reflected in the survey data where just 21 percent of people in the U.K. are confident that they will be able to afford their own healthcare in retirement. Among certain groups, confidence is even lower. Far fewer women (15 percent) are confident than men (27 percent), which may be symptomatic of women typically living longer than men and typically holding less in savings and retirement funds. Confidence is also lower among people who are currently in fair health (13 percent), who may already be able to more accurately calculate the financial cost of their health in later life. Millennials (26 percent) and those currently in excellent health (44 percent) are among the most confident, however, it is important to stay aware that health can rapidly deteriorate in later life which people should factor into their plan. This could include making lifestyle adjustments outside of immediate administration of medical care to requiring more thorough, immediate or specialised care that is not covered under the NHS. Chart 18 One-in-five people in the U.K. are confident that they will be able to afford their own healthcare in retirement 44% 27% 26% 21% 21% 15% 15% 18% 20% 13% 1979-2000 1966-1979 1947-1965 Global United Kingdom Men Women Millennials Generation X Baby Boomers Fair health Good health Excellent health Extremely or very confident Feeling confident about the affordability of retirement forms part of the desire to be able to age with a sense of certainty, autonomy and comfort. It is of particular importance for individuals to remain in their home as they get older. Ageing in place that is, the ability to live in one s own home and community safely in old age independently and comfortable regardless of age, income or ability level is of at least some importance to 92 percent of people globally, and U.K. levels are similarly high (93 percent). Two-in-five people in the U.K. (41 percent) say that the issue is extremely important to them, compared to 36 percent globally. As well as greater levels of concern in the U.K. among individuals losing their independence in retirement (chart 14, page 16), the high cost of residential care in the U.K. is likely to be contributing to the amount of individuals placing such high importance on ageing in place. The average place in a residential care home in the U.K. is 31,200 per year, and the addition of nursing brings costs to almost 44,000 per year (although costs vary greatly by region). 13 13 LaingBuisson, Care Homes for Older People: UK Market Report. July 2018 The Aegon Retirement Readiness Survey 2018 19

Chart 19 The majority of people in the U.K. say it is important to remain in their own home as they get older United Kingdom 2% 4% 19% 32% 41% 2% Not at all important Not very important Somewhat important Very important Global 1% 22% 5% 35% 36% 2% Extremely important Don't Know Despite this dominant preference, the typical British family home may not always be well-suited to individuals as they grow old and are less able to climb stairs, or even keep on top of household chores. Through D.I.Y. adjustments and/or new technology, homes can be developed, or devices installed, to help individuals age in place. For people in the U.K., bathroom modifications (35 percent), panic buttons (34 percent) and home security systems (32 percent) top the list. However, people in the U.K. are less receptive across all listed features and devices to help them as they age. Compared to the global average however, more people in the U.K. do not envision needing any adjustment (16 percent in the U.K. compared to nine percent globally). Chart 20 Bathroom modifications and panic buttons top the list of features and devices people the U.K. envision having added to their homes as they get old Bathroom modifications 35% 43% Panic buttons to call emergency services 34% 37% Home security system 32% 39% Age-friendly furniture Medical alert system to warn about changes in health (e.g., blood pressure monitors etc.) Ramps and/or grip bars 26% 24% 22% 26% 33% 37% Kitchen modifications 20% 28% Elevator / stair lift 17% 21% Video monitoring Robot to help with chores, medication management, communication, etc. Wheelchair accessibility 11% 11% 9% 20% 17% 18% Robot to keep me company 6% 9% Don't know / prefer not to answer None of the above 8% 9% 14% 16% United Kingdom Global 20 The Aegon Retirement Readiness Survey 2018