Could IFS project help solve the UK’s pensions crisis?
A two year project which aims to come up with long-term solutions to the UK’s pensions crisis has been launched by the Institute for Fiscal Studies in partnership with abrdn’s Financial Fairness Trust.
The Pensions Review will run for two and a half years and “comprehensively assess the consequences of current pension policy, the economic environment and individual behaviour for the future of living standards in retirement”.
It will also provide recommendations for reform to improve outcomes for future generations of pensioners across the UK.
The IFS said that since 2009 the average income of pensioners has been similar to that for those under state pension age.
“Pensioner poverty rates are lower than the population average. And more employees are saving into workplace pensions than ever before. These are all big policy successes.”
But a report published by IFS to launch the review found the future looks risky at best for many current workers hoping for a comfortable retirement.
It added: “The last twenty years have seen the continued decline of defined benefit (salary-linked) pensions in the private sector, the abolition of state earnings-related pensions, low interest rates, falling homeownership, low typical contributions to defined contribution schemes, and a collapse in pension saving among the self-employed.”
The review will be lead by three directors at IFS – Jonathan Cribb, Carl Emmerson and Paul Johnson – and will produce a series of detailed reports over the next two years on the challenges facing future generations of pensioners, with its main phase concluding in Summer 2025 when it will provide concrete policy recommendations and options for reform.
A steering group will be composed of Alistair Darling, former Chancellor of the Exchequer, David Gauke, former Secretary of State for Work and Pensions, and Joanne Segars, former Chief Executive of the Pensions and Lifetime Savings Association.
Paul Johnson, director of IFS, said: “The last decade or so has seen state and private pensions deliver much better outcomes for many pensioners. But there is a risk this has bred complacency among policymakers. Automatic enrolment has brought millions into workplace pensions, but all too often at much lower rates of saving than the Pensions Commission thought would be needed. Despite the number of self-employed people growing considerably, many fewer of them are saving in a pension.”
Alistair Darling, Pensions Review steering group member and chair of abrdn Financial Fairness Trust, said: “Twenty years ago we set up the Pensions Commission which laid out a range of important reforms including auto enrolment. But today much has changed and the landscape is very different. Too many are saving too little for retirement. Many self-employed and those in insecure work don’t have a pension. Increasing numbers are living in the private rented sector, which will lead to higher housing costs in later life. Whilst today, many pensioners are doing well on average and pensioner poverty has been cut drastically, we need a major review to avoid a future where too many won’t have enough to live on in their old age.’
Sangita Chawla, managing director at Standard Life, part of Phoenix Group, said: “The current pension system is under growing strain with a number of long-term pressures starting to build. As things currently stand many younger and midlife workers are at risk of missing even the PLSA’s minimum standard of living in retirement with the self employed and those who are likely to be renting in retirement especially vulnerable. This is despite the great strides forward made by auto-enrolment and plans to extend it to cover workers from age 18.
“With the onus increasingly on individuals to make complex financial decisions, particularly at the point of retirement, advice and guidance aren’t as accessible as they need to be and greater support is required to avoid people making costly mistakes.
“There are also difficult discussions to be had regarding the scope of the state pension, which is the bedrock of most people’s retirement, at time when the public purse is under huge scrutiny.
“The IFS team are well placed to look at these challenges in the round and we will follow this multi-year piece of work with interest.”
Pensions – what are the challenges?
We are saving too little
Many employees are saving very little for retirement, according to the report 60 per cent of middle-earning private sector employees who are contributing to a pension are saving less than 8 per cent of their earnings. Nearly 90 per cent of them are saving less than the roughly 15 per cent of earnings that Lord Turner’s Pensions Commission thought more appropriate. Almost all of this saving is coming in the form of defined contribution pensions, which leave individuals – rather than their employers – exposed to risks that may be difficult to manage well
Not enough people have a pension
Fewer than one-in-five of the growing number of self-employed workers are saving in a pension. This compares with around a third when the Pensions Commission reported. This is particularly concerning given that the decline in pension membership among the self-employed is greatest among those who have been self-employed for a long period.
Housing will be an issue
Increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation. At age 65, only three to four per cent of those born in the 1930s and 1940s lived in private rented housing, compared with six per cent for those born in the 1950s and with what looks likely to be 10 per cent for those born in the 1960s. Unless a wave of inheritances leads to rising homeownership, this percentage could be even higher for younger generations, leading to a combination of a disappointingly low standard of living in retirement and/or greater reliance on housing benefit.
State pension is not sustainable
Higher state pension ages are a coherent response to the challenges of increased longevity at older ages, but they pose difficulties for many and longevity improvements have not been as big as predicted a decade ago. The higher state pension ages rise, the harder it will be for people to remain in paid work until that age. Among those with low levels of formal education, 43 per cent of men and 46 per cent of women in their late 60s are disabled. A higher state pension age pushes up income poverty rates of those in their 60s: the latest increase, from 65 to 66, led to the income poverty rate of 65-year-olds more than doubling.
The UK’s population is ageing
The demographic and other pressures on the public finances are already considerable. 24% of adults are currently over the state pension age. This is projected to rise to 27 per cent by 2050 and 30% by 2070. This puts substantial pressure on public finances. The Office for Budget Responsibility projects state pension and pensioner benefit spending to rise from 5.6 per cent to 9.6 per cent of national income by the early 2070s; this increase is equivalent to £100bn a year in today’s terms. The pressures facing the public finances due to health spending are even larger.
Death of final salary pension schemes
Those retiring with defined contribution pension pots face considerable difficulty and risk in managing their finances through retirement. There are risks of running out of private resources or of being so cautious that people have a needlessly austere retirement. While pension freedoms do give people the opportunity to take control of their own finances, even for the most numerate the decisions on how to draw their pension wealth – which need to be made right through retirement – are difficult.