Marvin OnumonuThe Institute for Fiscal Studies (IFS) and the abrdn Financial Fairness Trust have published the final report of their Pensions Review, which set out a roadmap for reform to deal with challenges facing the UK pension system.
The review found that there were real risks to the finances of future generations, with fewer people set to benefit from defined benefit pensions, high homeownership and rising house prices compared to current pensioners.
Data showed that around 20% of private sector workers, and 80% of the self-employed, were not saving into a private pension.
Of those who were saving into defined contribution schemes, roughly 40% were expected to fall short of a standard retirement income.
The review also highlighted concerns about pressure on public finances from an ageing population, complicated decisions on drawing pensions, and more older people renting privately at higher costs.
To address these issues, the IFS and abrdn Financial Fairness Trust have recommended a four-point pension guarantee for the state pension.
They said the Government should set a target level for the state pension as a percentage of average earnings, with the triple lock used until that target is reached.
After that, the state pension would rise in line with earnings.
They added that the state pension should always keep up with inflation, and never be means-tested.
State pension age should only increase as longevity rises, but by less than the increase in life expectancy, so people spend more time on the state pension.
The review recommended stopping the practice where employer pension contributions are only paid if employees also contribute.
Instead, all employees aged 16–74 should get at least an employer contribution of 3% of their total pay.
Minimum pension contributions should be increased for those on average earnings and above, but not for the lowest paid.
For the self-employed, pension contributions could be added to self-assessment tax returns.
The IFS estimated the reforms would generate an extra £11bn per year in private pension saving.
Those on course for low-to-middle retirement incomes would see their incomes rise by an average of 13–14%.
The report also suggested extra financial support for people most affected by state pension age rises, such as enhanced universal credit for those within a year of state pension age, and higher housing benefit for pensioners renting privately.
The review suggested policies to help people manage their pension pots, including automatic consolidation of small deferred pots and more flexible but protective retirement income products.
David Gauke, former secretary of state for Work and Pensions and chair of the steering group of the Pensions Review, said: “The final report from the IFS’s review comes at the perfect time with the government’s own review expected to commence imminently. Pensions need long-term planning and, ideally, a broad consensus.
“The proposals put forward maintain an important balance between the state, employers and workers.
“The government should provide a secure pension income, further increases in the state pension age should be accompanied by more support for those hardest hit, and both employees and employers should gradually contribute more to help achieve greater financial security in retirement.”
Paul Johnson, director of the IFS and co-director of the Pensions Review, said: “There is much to celebrate about the current UK pensions system.
“The current generation of retirees is, on average, doing much better than any previous generation.
“Pensioner poverty is way down on the very high levels in the 1970s and 1980s, and is indeed below that for other demographic groups.”
Johnson added: “The state pension has been simplified and is now much more generous to many women than in the past.
“Many more employees have been brought into workplace pensions by the successful roll-out of automatic enrolment.
“But there is a risk that policymakers have become complacent when it comes to pensions.”
He said: “Without decisive action, too many of today’s working-age population face lower living standards and greater financial insecurity through their retirement.
“Our recommendations give government a clear and affordable roadmap: shore up the state pension, help workers save more – but only in periods when they are better placed to do so – and help individuals to make the most of their pension pots through retirement.
“Taken together, they would create a pension system fit for the next generation.”
abrdn Financial Fairness Trust said: “Many low earners are set to face financial difficulties when they retire, with one-in-three low earners currently saving into defined contribution pensions not on track to achieve a standard benchmark for an adequate retirement income.
“Many are not saving at all, especially the self-employed. This poses serious problems for individuals as well as the state, and action is needed sooner rather than later to avoid problems growing and to future-proof pensions.
“Our recommendations would bring an additional 5 million employees into pension saving and would significantly boost retirement incomes for those on low-to-middle incomes.”
Reaction:
Rory Marsh, workplace pension director at Royal London:
“The report’s findings are a timely contribution to the conversation to improve retirement provision, especially as the Government will shortly publish more details about its own review of retirement adequacy.
“The report rightly identifies the crucial role that workplace pension schemes play to support people in saving for their retirement, and the importance of the employer-employee partnership.
“The Government’s review should provide a clear direction of travel for future contribution levels so that businesses and workers have a greater degree of clarity and certainty to help plan their long-term savings.
“This report also emphasises the need for targeted support to bridge the gap between guidance and advice so more people access the support they need when it comes to saving for retirement.
“This is something we are keen to advocate for, so people are able to make better informed decisions at key life-stages.”
Mike Ambery, retirement savings director at Standard Life:
“Pensions are firmly in the spotlight at the moment. In recent weeks we’ve had series of major policy announcements that have set a clear direction of travel on the investment aspect of the system and a drive for fewer, larger schemes.
“The broader question of how we ensure people have enough to live on in retirement and receive the help they need requires further focus and the IFS paper, alongside the expected adequacy review from the government, will move this conversation on.
“The report correctly identifies widespread under-saving and gaps in pension provision. We are supportive of their conclusion that there is not a one size fits all solution to these problems but there is a need to be more inclusive, particularly for the self-employed, as well as for younger workers who are not yet included.
“The risk of over saving for those on low incomes is significant but so too is the need for most of those on average or higher earnings to save more.
“Striking the right balance will be a key challenge of the adequacy review, and any change would need to be carefully considered and in consultation, especially with employers.
“With the state pension accounting for a significant proportion of all welfare spending, the report highlights the risk that the state pension age could be pushed back further to maintain affordability.
“We agree that there are issues here and people’s ability to keep working haven’t necessarily kept pace with increases in state pension age, as evidenced by the rise in poverty levels among those in their early 60s.
“The report recognises that many aspects of the pension system design are moving in the right direction, with plans afoot to help consolidate small pension pots and reduce the complexity of decisions people face at retirement in particular.
“We see the need for a joined up approach between Targeted Support and default retirement income options as particularly important, as together they have the potential to reduce the anxiety that many people experience around making the wrong decision at the point of retirement. Targeted Support will also give individuals support in recognising that they might not be saving enough.
“The discussion on how default retirement income solutions will be designed is just getting going but we agree that these need to meet people’s twin need for a degree of income certainty and flexibility.
“This also recognises that decisions when not supported can sometimes have life-changing implications.
“We look forward to a long-awaited review of retirement provision, aligning with ensuring decisions in saving and spending provide support and guidance for both secure and better retirements through an integrated public and private retirement system.”
