The Government has revived the ‘landmark’ Pensions Commission — the body responsible for creating auto-enrolment for pensions in the workplace.
This relaunched commission will address issues of retirement adequacy. Advisers are positive about this relaunch, hailing it as a vital step and one that could even rekindle the social contract, though some are also asking why it took so long.
The Commission will comprise of the original commissioner, trade unionist and Labour life peer Baroness Jeannie Drake, Sir Ian Cheshire, the former CEO of Kingfisher and Nick Pearce, professor of public policy and director of the Institute for Policy Research (IPR) at the University of Bath. Its first report is due in 2027, with this line-up widely praised for its experience and breadth.
The Commission was announced by pension ministers along with stark warnings about employees not saving enough, of future falls in retirement pots compared with those retiring now, and concerns about the numbers not saving for retirement at all.
A separate review of the state pension age has also been launched, although this will not report until 2029. Advisers have noted that if this recommends increasing the state pension age to 68 earlier than currently planned, this will put even more focus on workplace and private pension savings.
It is interesting just how tough some of the language has been accompanying the Commission announcement. Secretary of State for Work and Pensions Liz Kendall, while asserting auto-enrolment’s success said: “Put simply, unless we act tomorrow’s pensioners will be poorer than today’s. Because people who are saving, aren’t saving enough for their retirement. And – crucially — because almost half of the working age population isn’t saving anything for their retirement at all. That is some 18 million people. The opposite of the promise on which the welfare state was founded. Not what the Turner Commission envisaged.”
The Government also issued some more detailed statistics – see box below.
A few days before the announcement, LCP partner Steve Webb, a former pension minister, had warned the adequacy review could be ‘nobbled’ by the Treasury if it did not have a wide enough remit. Yet he was positive about the Commission’s relaunch, with comments — quoted on the government’s press release — praising the commissioners and noting how the first Pensions Commission changed the UK pensions landscape, while also warning about the challenging backdrop for further reforms.
Overdue reforms
Martin Willis, partner at consultancy Barnett Waddingham says: “There’s no doubt that this is a good thing, it just never should have taken this long. Auto-enrolment is often referred to as a success, but it’s more accurate to say it was a success. It could be a success in the future too, but right now, as these stark figures show, the job is half done at best.
“Successful foundations were built but they shouldn’t be left to crumble. Saying contribution rates have increased tells half the story. Overall, more is being saved due to hugely increased private sector participation, but average contribution rates paint a less positive picture. The current minimums have led to levelling down of saving for many and some of the groups that will be most at risk of poor outcomes still save nothing at all.”
The Institute for Fiscal Studies, has been carrying out a ‘pension review’ since 2023, with its final report issued just a few weeks’ ago. It also welcomed the study but added that it was long overdue.
It has its own recommendations to address the adequacy issue. It wants to see “more pension contributions at points in people’s careers where they can most afford a reduction in take-home pay. In addition, pension participation should be extended by providing employer contributions to almost all employees, even those who do not make an employee contribution”.
Many in the industry are acutely aware that a significant increase in minimum contribution levels will impact living standards today, particularly among lower income groups that have been hit by the cost-of-living squeeze.
Speaking to the Today programme on the morning of the announcement, Royal London’s chief executive Barry O’Dwyer suggested more gradual increases to address this. He said: “The money has to come from somewhere. But if we do this gradually and over time – and I’m talking about maybe over a decade, maybe more – then we won’t feel it in the same way that most people didn’t feel automatic enrolment contributions increasing as they did over the 2010s.”
Damon Hopkins, head of DC workplace savings at Broadstone says: “The long-term approach of the Pensions Commission is vital as it will ultimately create the framework for what we hope is a successful auto-enrolment regime driving positive outcomes for decades to come.
“Ultimately, the Pensions Commission will be judged on its actions in 20 or 30 years as to whether today’s workers reach retirement with the savings required to maintain a good standard of living and minimise the State’s financing (which is becoming increasingly unsustainable) of their later lives.”
Hannah English, head of DC corporate consulting at Hymans Robertson says: “The announcement of a Pensions Commission from the government marks is another significant step in the transformation of the pensions landscape. A Commission is an essential ingredient of a re-kindled social contract and long-term financial independence and sustainability. It’s a step we have strongly advocated for and fully support, and aligns with the direction set out in our reports, The Untapped Potential of Pensions and A Pensions Plan for a New Government.”
Hopkins adds: “The Commission’s role is to consolidate existing data into clear, actionable recommendations. This is a critical, arguably overdue, moment for the UK’s pension provision and it is right that the Commission makes use of all available resources to come to its conclusion that will hopefully
foundation to build upon. Participation and levels of savings will be the key issues for the Commission to address. We would expect a clear timeline for increases to minimum contribution rates as a bare minimum following the review.
“Increasing the number of people paying into a pension will be more complicated – it may involve lowering the minimum age or pulling other levers to bring more workers into the AE framework. These changes will be challenging in what is an increasingly complex environment, but the Government simply can’t afford to keep kicking the can down the road.”
He adds that a later state pension age will increase the need for more fundamental changes to AE and retirement saving.
“It also seems inevitable that we will see changes to the state pension albeit a later SPA would, of course, double down the need for reform in the private savings landscape.”
In terms of the appropriate speed reform should move at, Hopkins adds: “The Government needs to balance the requirement to implement meaningful action quickly with the need to ensure any changes are well planned and sustainable.
“Constant, short-term tweaks undermine confidence, increase disengagement and are not appropriate for an effective long-term savings infrastructure. Auto-enrolment was successful because it was methodically planned and executed which instilled trust amongst all stakeholders – we need to build on that trust by ensuring it meaningfully benefits people’s retirement outcomes.”
English, in particular, is supportive of addressing issues for the self-employed and women.
She says: “The Commission has stated its intent to consider expanding auto-enrolment by closing the gaps for the self-employed and lower-paid workers. We are very supportive of this. Only around 20 per cent of self-employed workers save for retirement, compared with nearly 90 per cent of the employed population eligible for auto-enrolment. This has dramatically reduced since 1998 when 48 per cent self employed saved into a pension. Any plan to fix retirement adequacy needs to include self-employed workers.
“Further, too many lower paid earners are not caught by current AE legislation, and even of those lower earners who are included in AE, only 48 per cent are paying at minimum levels. Extending auto-enrolment to all workers can help achieve retirement adequacy and narrow the pensions gender gap.”
Wilis also notes that the recommendation to lower the minimum age and scrap the earnings limit will be 10 years’ old by the time the new Commission reports, and he is not sure we will see change on either of these issues until the 2030s.
He adds: “We’ve known the first set of answers for years. By the time the Commission reports, a decade will have passed and many people who need it most will have missed out on £5,000 or more of contributions (based on 8 per cent of the £6,240 lower earnings limit).
“The Private Members Bill that covered this received Royal Assent in 2023 and could be enacted without delay whilst the Commission undertakes its work. Plus, with a general election due 2029 at the latest, how likely is it that recommendations which result in employers and employees paying more are actioned before the next Government. Realistically meaningful change will now come in the 2030s, by which time a generation will have a significant gap to plug.
“Talking of this gap – it’s positive that fairness across various demographics and pensions inequality is being considered. Reviewing the state pension age will need to carefully consider inequalities in life expectancy alongside more general trends.”
