The pensions industry has welcomed the interim report from the second Pensions Commission, saying this identified clear problems around undersaving and early encashment of pensions that require “bold action” at the earliest opportunity.
This Pension Commission interim report will lead to more substantial work on improve retirement adequacy across the UK, but its initial findings have raised the prospect of raising minimum AE levels — at least for the vast majority of employees on at least average earnings.
This would benefit the pensions industry with more money flowing into workplace pensions schemes.
The initial findings also mean the commission could recommend new AE options for the self-employed, and potentially further reforms to the state pension.
Many across the industry highlighted the Commission’s finding with regards to too many people cashing in their pensions at the earliest opportunity.
Broadstone head of policy David Brooks says: “There are concerning findings around how quickly people are rushing to access their pension and the proportion who are fully encashing their pot, leaving them vulnerable to running out of money later on in retirement.
“The Report suggests that there is significantly more work to be done across the pensions industry to provide innovative solutions for millions of people – especially lower earners and the self-employed – to bring them into the system and begin to support their pension saving journey.
“While increasing minimum automatic enrolment contribution rates will inevitably form part of the debate, this is unlikely to be a panacea given the current budgetary pressures facing many households. Encouragingly, there is already a broad package of reforms that have just been passed into Law which aim to deliver better value for money for pension savers as well as improving awareness, engagement and outcomes.”
Catherine Foot, director of the Standard Life Centre for the Future of Retirement says: “While AE has successfully brought millions more people into pension saving, the hoped‑for levels of voluntary saving above the low default rates have not materialised with the current system instead giving people a false sense of security that they are saving enough for the retirement income they need.
“Despite tough economic conditions, we’ve found that employers want to support greater pension saving. They are crying out for clarity on what these changes might look like and need greater certainty about timing, pace and budgeting for any changes. That’s why it’s important a consensus is found that begins to look beyond the immediate challenges and builds broad support around a pension system that delivers better outcomes in the long-term.
“Ultimately, ongoing inaction will mean costs will be borne by government, employers and society further down the line, placing further strains on social support systems and increases in poverty among those in and approaching retirement.”
Smart UK CEO Jamie Fiveash adds: “Auto-enrolment has been one of the UK’s great policy successes. But the industry now faces a new generation of challenges: employees struggling to increase contributions amid cost-of-living pressures, employers managing rising costs, the continued decline of defined benefit provision, and persistent adequacy gaps.
“One important part of the solution is a stronger focus on long-term net returns for savers. Even a 1 per cent difference in investment performance over a working lifetime can add six figures to a pension pot at retirement. In an environment where contribution levels are difficult to increase, improving outcomes through better long-term performance becomes even more important.
“Closer attention to pension scheme net returns by advisers and employers, can allow savers to optimise their retirement savings. The Pension Schemes Act Value for Money (VfM) framework is specifically designed to provide clearer, more transparent, and easier comparisons of pension fund values for savers, employers, advisers and trustees. Given today’s report, we have an opportunity to adopt its focus and purpose as early as possible.
“We would like to see a net returns measure applied across the entire DC market, including the retail sector by 2028, to create a true level playing field and allow all savers to make meaningful like-for-like comparisons based on value, not just cost.”
Ruari Grant, head of policy and external affairs at TPT Retirement Solutions adds: “This is an important moment for us to digest this key Commission report on adequacy, especially after a period where so much attention has been diverted to structural and investment matters.
“As the report notes, 40 per cent of workers are under-saving for retirement: this is sobering and I hope it will lead to some bolder decision-making – in AE we have the foundations, but at current thresholds, outcomes will remain inadequate. Let’s not forget, we’ve now been waiting almost a decade for the AE review’s recommendations to be implemented, and trends such as declining home-ownership and under-saving among the self-employed in retirement will only exacerbate the situation.
“The report’s focus on decumulation is welcome, as adequacy doesn’t simply rely on paying in enough – savers must also be able to access their money in a safe, simple and reliable manner without needing to understand all of the complex factors at play.
“The debate now has moved on: this is no longer about getting people to save, but ensuring the system they’re saving into will actually deliver a decent retirement”.
L&G CEO Antonio Simoes says: “This report shows that the UK cannot afford to stand still on retirement saving. Just as savings compound over time, so too can inequalities and gaps in opportunity if the right action isn’t taken. The Commission’s work alongside employers and industry is vital to understanding and breaking down the barriers to saving, and to building a pensions framework that gives everyone the chance of a secure and dignified retirement in the decades ahead.”
Ian Cornelius, CEO of Nest, said: “We welcome the Pensions Commission’s report and the serious, long-term thinking it brings to one of the most important challenges facing working people in the UK today: lifelong financial security.
“Nest has been built to serve everyday UK workers; the very people automatic enrolment was designed to support. We’re pleased to see their needs placed at the heart of this report. Any reforms must be built around inclusion, focussing on what works for those previously underserved by the pensions system such as low- and moderate-income (LMI) workers, people with caring responsibilities, multiple job holders, the self-employed, and people from diverse backgrounds.”
Fidelity International head of platform policy James Carter says: “Automatic enrolment has been a clear success in increasing participation – ensuring that more people than ever before are investing through a workplace pension – and it has played an important role in reducing pensioner poverty. However, participation alone is not enough. We know that too many people still face inadequate retirement outcomes, and without action this challenge will only grow.
“A key theme within the Commission’s work is pensions adequacy and how we build on the success of AE. Our own research shows that many people approaching retirement are under-estimating how long their savings may need to last. Addressing this requires greater support to help individuals answer fundamental questions such as ‘how much is enough?’ and ‘how can I make it last?’, alongside clear, long-term planning that gives people confidence in a stable system.
“The Commission rightly highlights the differing experiences across the population, with some groups facing particularly stark challenges. Closing these gaps will be a significant part of its work.”
