Pensions Commission launched to build future-proof pensions system
Pensions
Just in time for summer, the Government has launched two pensions reviews, but has ducked the chance to review the design of the state pension. The reviews include:
- A revived Pensions Commission to look at ways to prevent tomorrow’s pensioners being poorer than today’s and with a remit to consider the long-term future of our pensions system.
- A review of the State Pension age, which is broken down into two parts (a review from the Government Actuary on the proportion of later life in retirement and another independent report on other relevant factors that should be considered).
Pensions Commission
The relaunched Pensions Commission will explore the complex barriers stopping people from saving enough for retirement, with its final report due in 2027. It will look to tackle are the statistic that retirees in 2050 are on course for £800 or 8% less private pension income than those retiring today and that 40% of people, nearly 15 million, are under-saving for retirement.
It will examine the pension system as a whole and look at what is required to build a future-proof pensions system that is strong, fair and sustainable. Focusing on:
- Three million self-employed people who aren’t saving
- Why three-quarters of low-earners in the private sector are not saving
- Why only a quarter of those from a Pakistani or Bangladeshi background are saving
- The 48% gender pensions gap that sees women’s private pensions at retirement being roughly half of men’s; and
- Changes to increase retirement saving including through increases to the minimum contribution requirements under automatic enrolment.
The Commission will include Jennie Drake (who participated in the 2006 Pensions Commission) the businessman Sir Ian Cheshire and Professor Nick Pearce, who will steer the group. It will work closely with the CBI and TUC.
The review will consider increasing contribution rates from their current 8% on the automatic enrolment earnings band, potential changes to the minimum and maximum age bands and the earnings thresholds. It will also consider poor savings rates among the young, lower-paid, women and the self-employed, with the drop in savings rates among the latter, from nearly half in the 90’s to fewer than 20 per cent now leaving nearly three million of the self-employed failing to save.
While the pensions industry has been urging Government to move towards a 12% contribution rate, Ministers are clear that no changes to rates will happen in the current Parliament.
State Pension Age reviews
Despite recent reports indicating that the Triple Lock is increasing the State Pension as a proportion of GDP at an unsustainable rate, the Government has limited the assessment of the State pension to the minimum it legally required to do.
The review into the State Pension age (SPA) will be carried out by Dr Suzy Morrissey which will report on factors the government should consider in relation to the SPA. The 2023 Review of the SPA planned a review within two years of the current Parliament enabling the government to consider the planned rises to 67 and 68 (scheduled to be phased in between 2044 and 2046). This will ensure that the government is able to consider the latest information which was not available to the independent reviewer during the 2023, including 2021 Census data, the current economic position and the impact on the labour market of Government measures to tackle inactivity.
The 2023 review found that the rules for the planned rise in the State Pension Age from 67 to 68 were appropriate, but that alternate options could be considered as they would meet the 10 years notice period (stipulated by the previous government).
The Government Actuary’s Department will prepare a report on the proportion of adult life in retirement. The previous SPA report was complemented by one from Baroness Neville-Rolfe, shortly after the COVID-19 pandemic, that supported the target of 31% of adult life being spent in receipt of the State Pension – these stymied plans to bring forward the current timetable for increasing the SPA to 68.
Research reports
The review launches are accompanied by a series of research reports:
Isio’s view
We welcome the launch of the Pensions Commission. There is a clear need to focus on ways to widen and deepen private retirement saving in the UK. The reviewers will need to tread a fine line to come up with policy suggestions that balance simple messages for employees and retirees with a structure that is transparent about when and where retirement provision is self-evidently beneficial and when it pays to take care of today’s rather than tomorrow’s plans.
The Commission will have the opportunity to weigh up the substantial body of research and evidence on savings and to give the Government a clear route to bridging the savings gap for current workers, including tackling the gender gap that stubbornly persists. Measures to drive up contribution rates as individuals progress through earnings levels while easing off when earnings drop can help generate the collective understanding needed to deliver better retirement outcomes.
It does feel like the Commission will be working with one hand tied behind its back, as its remit does not include looking at the design of the State Pension which is the foundation for most savers retirement planning. While the State Pension Age element will be reviewed, this ducks issues of wider adequacy and affordability in the long-term, e.g. the ratchet effect of the Triple Lock. While the Triple Lock has provided a welcome short-term fillip for pensioners it is difficult nettle for politicians to grasp, as evidenced by the recent analysis showing it has cost 3 times more than originally expected but the Government has committed to it for the remainder of this parliament. Building consensus on a sustainable future indexation policy is essential. The State Pension will remain the cornerstone of the UK’s retirement provision but clarity about what proportion of average earnings it delivers needs to be tackled. Delivering consensus on such a politically charged matter is not a small job and not including it within the Commission’s remit feels like a missed opportunity.
Too much finessing at the edges to provide additional support for those on lower incomes cannot detract from the building up broader and deeper retirement provision for those in the workforce. A strong base with clear incentives to save has to be set out sharing the responsibility for saving between employers and individuals in a way that provides a pension system fit for the long-term.
We hope the Commission will be able to make progress on improving employees’ financial resilience as well as boosting the attractiveness of pension savings. This includes considering pensions sidecar savings products, allowing individuals to access pension savings for emergencies or specified longer term objectives (e.g. a house deposit).
Iain McLellan
