The Institute of Fiscal Studies will seek to ‘improve’ rather than redesign the UK’s pensions architecture through a cross-party review, which will make recommendations on how to boost levels of retirement savings.
This is widely seen as the most wide-ranging review into the UK pensions landscape since the Lord Turner report resulted in the introduction of auto-enrolment. Speaking at Corporate Adviser’s Master Trust and GPP Conference today, Jonathan Cribb, an associate director of the IFS updated delegates on the progress so far and outlined the main issues the review is seeking to address.
The first part of the review is due to report in December and will include recommendations on the way forward for the state pension. Later instalments will be published in the summer of 2024, and towards the end of that year, with the final report due by mid 2025.
Cribb said that the pensions landscape had been “transformed” since the initial Turner report recommendations 20 years ago. Increased longevity, higher levels of self-employment, far higher number living in insecure private rented accommodation, pension freedom rules, the switch from DB to DC, changes to the state pension and macro-economic conditions, caused by recession, austerity and the pandemic mean there could be higher levels of inadequate living standards in retirement with reform to the current system.
Although Cribb did not outline what likely recommendations will be, it seemed clear from his presentation that the IFS will be looking to make recommendations on improving contribution levels, reforming the triple lock on the state pension, including self-employed people within AE, and ensuring people get better help with making decisions when it comes to taking their retirement income. Cribb added that it also seems to make sense for those in workplace pension to have ‘one pot’ rather than a series of individual pension contracts, although he said more work needed to be done to see whether ‘pot follows member’ or ‘pot for life’ was the better version,
Cribb said that the pension systems faces a number of challenges, not least the relatively low levels of contributions through private and occupational pensions. He pointed out that 61 per cent of private sector employees (on middle earnings) are contributions less than 8 per cent of their earnings into a pension scheme; and 87 per cent are contributing less than 15 per cent of their salary. This 15 per cent contribution rate has widely been seen as the level needed to deliver adequate living standards in retirement.
He added that this contrasts with public sector pensions where typically employees have around 20 per cent of their salary going into pension provision. This is one of the reasons why public sector pensions will remain outside the scope of this review.
Cribb also pointed out that this problem was significantly worse among the self-employed who remain outside the scope of AE. He added those that do contribute to pension tend to get stuck on a ‘round figure’ monthly contribution which is not uprated, so in real terms declines over time. This contrasts with employees in DC schemes where contributions are linked to earnings which tend to be uprated over time.
Cribb did not say what the IFS recommendations will be and whether it should be employers or employees bearing the brunt of any mandated increase. However he said he did not think that employees would tend to see increases as a stealth tax. Cribbs says that many people are concerned about retirement income levels “and would not discount the value of these increased contributions”, which by definition would be ring fenced in a fund rather than going into general taxation.
Cribbs also said that there remained limited headroom for the government to provide further help, particularly with the projected increases to spending on the state pension and particularly health and social care in the coming decades due to an ageing population. He pointed out that the government would retain the option of raising the state pension age as a level for reducing costs – but his figures showed that this is likely to “concentrate poverty increase hardship and poverty among certain groups”.
The other major challenge that the IFS will address is decumulation. Cribbs says this is becoming an issue due to the combination of increased longevity and far higher levels of DC savings. He pointed out that people have a high degree of uncertainly around longevity, with the figures he shared showing a na retiring today has a one in four change of dying before the age of 79 but also a one in four chance of living beyond the age of 91. People are being asked to make complex decisions and in many cases, unless the annuitise, they will be making these complex decisions into their late 80s and early 90s where there may well be a degree of normal and abnormal cognitive decline he added.
Although he did not set out what sort of recommendations the IFS might make to address these issues he said there was a clear need for this “concerning problem” to be looked out now. “We need to think about what to do now not in 10 or 20 years time.”
