I cannot get very excited by the results of two years work between IFS and “Abrdn” (thought that was Aberdeen once more?).

It addresses the fairness of the pension system and finds that if you work in the private sector (especially for yourself) you are making less use of the pension system than in the public sector where you get paid a pension (unless you opt out). You may think that you are getting a pension when in a workplace pension but of course you aren’t, you’re getting a pot and not a very big pot (says the not so stunning research).

We will get many repetitions of this work – the first by the FT – the bulk from the asset managers and insurers whose business plans have assumed a steady growth in pension contributions from the private sector to level up. That hasn’t happened under the semi-mandatory auto-enrolment system and looks less likely to be addressed as hoped (the 2017 review) than at any time prior to the middle of the decade (eg now).

The report is a whinge. Here is what IFS (paid by Abrdn) have to say –  it’s undisputable but a little lame. If you don’t want 97 pages, I’ve included the summary beneath.

This final report of the Pensions Review, a major project launched in April 2023 by the Institute for Fiscal Studies, in partnership with abrdn Financial Fairness Trust, examines the main risks to today’s working-age individuals in the UK pension system and sets out policy proposals primarily focused on improving outcomes for future generations of retirees. This report does further analysis and draws on the large number of reports we have published as part of this review.

Challenges within the current system

The current UK pension system, with automatic enrolment of most employees into private pensions alongside a flat-rate state pension payable from a single state pension age, offers significant advantages. This simple design encourages private pension saving while also providing flexibility for those who wish to either opt out of saving or alternatively contribute more. It does not need a complete overhaul. But despite its strengths, the system faces significant challenges.

An ageing population places pressures on the public finances through increased spending on state pensions and in particular on health and social care. A generously indexed state pension adds to these growing pressures. The ‘triple lock’ increases the value of the state pension in an unpredictable way and it could reasonably be expected to push up state pension spending by anywhere between £5 billion and £40 billion a year in 2050 in today’s terms. Rising state pension ages have substantially pushed up the risk of income poverty among those in their mid 60s. Those reaching retirement in the private rented sector, increasing in number, are also at a heightened risk of poverty throughout their retirement.

Additionally, many employees – and an even higher fraction of the self-employed – are not saving enough privately for their retirement.

 

As shown in Figure ES.1, 39% of private sector employees are not on track to reach their ‘target replacement rate’ – a benchmark for avoiding large falls in standards of living at retirement as defined by the 2002–06 Pensions Commission. The graph also shows that 13% are not on track for the Pensions and Lifetime Savings Association (PLSA) minimum standard (a post-tax income of £13,400 per year for a single pensioner or £21,600 for a pensioner couple, after housing costs and living outside London). Low earners are considerably more likely not to meet the PLSA minimum standards (32% are projected not to meet this level on the basis of their individual incomes). Middle and higher earners are particularly likely to face a significant drop in living standards at retirement (e.g. 50% of those in the third quartile of the earnings distribution would miss their target replacement rate). With low rates of pension participation among the self-employed, 63% of self-employed workers are projected to fall short of their target replacement rate and 66% are projected to miss the PLSA minimum standard. More saving is needed.

At the same time, while there is a clear case for many working-age people to save more for retirement, it is important to recognise that increasing saving – and therefore reducing spending – of working-age households who are currently on a low income and struggling would create greater hardship today. Evidence suggests that this trade-off remains the case if the saving is undertaken by employers on behalf of their employees, as wages would likely fall (or grow less quickly) – at least somewhat – in response to higher mandated employer contributions.

There are also clear challenges in the current pension system for when and how pension wealth is accessed. The introduction of ‘pension freedoms’, which means that since 2015 no one is obliged to purchase an annuity with their pension pots, has had advantages for many. But it also exposes some people to risks they would not have faced had they either had a defined benefit pension or purchased an annuity, and then spent their income each year. Many are insufficiently supported on how best to manage longevity, investment and inflation risk when drawing down on their pension wealth through retirement, especially at older ages. This is an even bigger challenge when each change of employer creates a new pension pot for employees, which fragments retirement savings, making them easier to lose track of and unduly hard to manage well.

Combined, these factors are a recipe for too many to have poor financial security through retirement. In this report, we therefore make a set of proposals designed to address these key issues facing the pension system.

Reforms for an improved pension policy framework

Our proposals aim to ensure that the state pension system provides a reliable foundation for private saving. We focus on reforms to improve outcomes for those most at risk of poor retirement outcomes under the current system. We recognise that not everyone can afford to save more every year, so our recommendations help protect take-home pay for lower-income groups. More needs to be done to simplify decision-making for individuals, to help strike a fairer balance of responsibility among the state, individuals and employers when it comes to pension saving.

To achieve these outcomes, we propose a series of reforms, set out in more detail in Chapter 2. The key themes of these reforms are:

• State pension. We propose a ‘four-point guarantee’ for the state pension to increase confidence in the state pension as a stable and secure basis of the pension system. This guarantee means that: (1) a clear earnings-linked target for the new state pension should be set to improve predictability and to make sure that pensioner incomes keep up with increases in living standards; (2) the state pension will always increase in line with at least inflation; (3) the state pension will never be means-tested; and (4) the state pension age should continue to increase as longevity at older ages rises, but not by as much as that increase in longevity.
• Private pension saving. Many need more income in retirement. Too many employees miss out on employer pension contributions, so minimum employer contributions should be extended to almost all employees and apply from the first pound of their earnings. The automatic enrolment system should help people save at points of life when it is easier for them to do so. By increasing defaults for total pension contributions when individuals are on (and above) average earnings, the government can protect take-home pay when individuals are on low earnings, but still deliver a boost to many people’s retirement incomes. The government should make it easier for self-employed people to participate in a private pension, utilising HMRC’s Self Assessment system and drawing on the lessons of what has made automatic enrolment such a success in boosting workplace pension participation among private sector employees.
• Means-tested support. As the state pension age continues to rise, universal credit should be enhanced for those in the run-up to that age. This can be done for a small fraction of the fiscal savings from increasing the state pension age, and would help to alleviate the increase in poverty that would otherwise occur. Means-tested support for pensioners should be streamlined to boost take-up, and housing benefit should be made more generous for the growing number of pensioners residing in the private rental sector.
• Managing retirement incomes. Pensions need to be easier to manage, particularly through retirement. Fragmentation across many small pots needs to be reduced dramatically, with the level for automatic consolidation of pensions rising once it has been successfully implemented for the very smallest pots. People should be guided towards sensible ways of drawing on their pensions that reduce the risk of them running out of private resources, such as hybrid ‘flex then fix’ solutions (combining the flexibility of drawdown earlier in retirement and the purchase of an annuity later in retirement). However, even very well-designed default solutions will not be right for all, and people should be able to get high-quality information to make sensible decisions without having to take expensive financial advice.

Benefits of our policy reforms

Our proposals for the state pension would improve the predictability of the future level of the state pension and guarantee that state pension income is never means-tested, building confidence in the state pension system and allowing it to provide a stable foundation upon which to build private retirement savings.

Our proposed reforms to private pensions would result in more private saving – our modelling suggests around £11 billion a year – on top of the foundation provided by the state pension. Our suggested enhancements to automatic enrolment would reduce the share of people with an ‘inadequate’ income in retirement, and the largest percentage increase in retirement incomes would come for those currently most at risk of low retirement incomes. Importantly, the effects would be substantial for younger adults, who would see the benefits of our proposals over the whole course of their working lives (see Figure ES.2). The share of 25- to 34-year-old employees saving in defined contribution pensions who are projected to miss their target replacement rates would fall by 14 percentage points, from 38% to 25%, while the share predicted to fall short of the PLSA minimum retirement living standard would more than halve under our proposals, from 13% to 6%.

The effects on pension adequacy for older working-age adults are smaller, as they have fewer years before retirement to save more. This highlights the cost of delay. Acting swiftly ensures more generations have time to benefit for longer from increases in private pension saving. By implementing these policies sooner rather than later, the pension system can better help more of today’s working-age population build a more financially resilient retirement.

In addition to reducing the fraction of workers facing inadequate retirement incomes, what really sets our proposals apart is that, by carefully targeting increased saving, we would achieve this while mitigating falls in working-life take-home pay for those struggling on lower earnings. And, by both increasing the level and extending the reach of minimum employer contributions, we would ensure this extra saving is the shared responsibility of both employees and their employers. Our automatic enrolment proposals would boost private pension saving by around £11 billion a year, with roughly half of this coming from increased employer contributions and half from increased employee contributions. This increase in contributions would attract around £3 billion a year of additional up-front tax relief. Our proposals to facilitate pension saving for the self-employed would also benefit this group which has particularly – and worryingly – low pension participation.

However, just helping people to accumulate more savings is not enough. Currently, people are reaching retirement with too little assistance in how to put the savings they have built up to good use. Our proposals would reduce the risk of people making poor financial decisions with their retirement savings by helping them consolidate their pension pots, thereby simplifying the problem, and guiding them towards good decisions – for example, through default product offers – without necessarily having to access expensive ongoing financial advice.

Finally, there will always be some who need extra financial support from the state in old age. Our proposed reforms would help these people in a well-targeted way by boosting means-tested support for some of those hardest hit by increases in the state pension age and the growing numbers living in the private rented sector in retirement.