The Government must take ‘decisive action’ to address the challenges facing the UK pensions system, says the Institute for Fiscal Studies.
In the final report of its Pensions Review, created in partnership with abrdn Financial Fairness Trust, the IFS set out a number of reforms it believes will move the UK’s pension system towards one that will provide a secure State Pension; increase the number of workers saving into a private pension and offer solutions to help people manage their pension wealth through retirement.
While the report acknowledges that there have been “major improvements” to the UK pensions system in recent decades, it says serious problems remain for the next generation of pensioners. It warns that fewer will benefit from defined benefit pensions, high levels of home ownership and rising house prices enjoyed by the current generation.
It said an ageing population is putting strain on the State Pension system and there is low confidence in how much the State Pension will provide in the future.
To combat this, the IFS recommends the Government choose a target level of the new State Pension as a fraction of economy-wide average earnings and once that target is met, the State Pension would rise in line with average earnings growth.
It also believes the State Pension should grow at least as fast as inflation and State Pension age should only rise as longevity at older age rises. The report also argues that the Government should commit to never means testing the State Pension.
Additionally, boosting private pension saving in a targeted way is critical to addressing the challenges in the market. At present, around 20% of private sector employees and 80% of self-employed workers are not saving in a private pension.
According to the report, the Government should end the practice where employer pension contributions only have to be made if the employee also contributes and put in place a system whereby all employees receive at least an employer pension contribution worth 3% of their total pay.
The report also puts forward a case for increasing minimum default total pension contributions under automatic enrolment, particularly for those on overage earnings and above. It says this would boost private pension saving but protect take-home pay in periods when individuals have low earnings.
In addition, the IFS supports new mechanisms to encourage pension-saving by the self-employed, such as integrating pension contributions into self assessment tax returns.
The IFS has also called upon the Government to improve means-tested support, with the introduction of additional targeted financial support for those most affected by increases in the State Pension age.
Finally, it believes that there should be greater help for managing pension wealth in retirement, warning that some pension savers risk running out of private pension wealth later in life, while others are too conservative and do not enjoy the fruits of their savings.
The report recommends expanding the automatic consolidation of small deferred pension pots; facilitating and encouraging flexible but protective default retirement income products; and ensuring people can access high quality information and support without having to pay for ongoing financial advice.
Paul Johnson, director of IFS and co-director of the Pensions Review, said: “There is much to celebrate about the current UK pensions systems. But there is a risk that policymakers have become complacent when it comes to pensions. 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 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.”
Mike Ambery, retirement savings director at Standard Life, said: “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.”
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