The government needs to take ‘decisive action’ on pensions, including addressing AE minimums, to ensure the system is fit or the next generation of retirees, according to the final report from the Institute of Fiscal Studies.
After a two-and-a-half year review of the state, workplace and private pensions the IFS has a number of recommendations to improve retirement outcomes. When it comes to workplace and private pensions it is calling for increased AE minimums for those on above average earnings. It says it also wants all employers to contribute 3 per cent of workers pay into a pension, regardless of whether they contribute themselves.
It says both will boost private pension savings, but protect people’s take-home pay when people have low earners. It also calls for new mechanisms to facilitate pension saving by the self-employed.
The IFS calculates that these proposals alone would generate an additional £11bn per year into pensions savings (£5bn form employers, and £6bn from employees) and would boost the retirement incomes from those on low-to-middle earnings by an average of 13 to 14 per cent.
It adds that 40 per cent of those currently savings into DC arrangements are not on track to retire with an adequate retirement income.
The IFS also says far more needs to be done to help people manage wealth in retirement. It acknowledges the difficulty of this issue, but calls for the government to facilitate “default retirement income products” that model a ‘flex and fix’ approach – with drawdown options offered earlier in retirement before switching to the security of an annuity at a later age.
It also called for the government to expand the automatic consolidation of small deferred pension pots, especially for those approaching, or above, the state pension age.
The IFS also voiced support for the recent targeted support proposals and says the Government needs to ensure people can access high-quality information and support without having to pay for ongoing and expensive financial advice.
When it comes to the state pension system the IFS says the government should chose a target level for the new state pension and use the triple lock to reach that target, but once this is met the state pension should simply rise in line with average earnings growth — or inflation if this is higher. If this means the pension is then above the set target, the pension would in future rise with inflation (rather than earnings) until it returns to target. It says a similar mechanism has worked in Australia.
David Gauke, former Secretary of State for Work and Pensions and chair of the steering group for this Pensions Review, says: “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.”
IFS director and co-director of this Pensions Review Paul Johnson adds: “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. 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. 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.”
The review was financed by Abrdn’s Financial Fairness Trust. It has been broadly welcomed by many in the pensions industry.
Royal London workplace pension director Rory Marsh says: “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.”
People’s Partnership CEO Patrick Heath-Lay says: “The IFS proposals challenge conventional thinking around the development of automatic enrolment and are likely to prompt debate over proposals to boost pension savings.
“Their analysis highlights a central dilemma for pension reformers; how to raise overall pension saving to address the savings adequacy gap without forcing lower earners into saving too much, potentially reducing their standard of living. This issue – alongside the need to balance higher savings rates with the impact on employers – must be addressed in the second phase of the Government’s pensions review.”
Standard Life retirement savings director Mike Ambery says: “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. 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.
He adds: “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.”