The Institute for Fiscal Studies (IFS) is launching a multi-year pensions review, in partnership with the Abrdn Financial Fairness Trust.
It will examine the effects of changing economic conditions and public policies on the future of financial security in retirement, including how these effects differ by gender, ethnicity and across the UK.
The IFS directors leading the review will draw on strategic advice from a steering group of former chancellor Alistair Darling, former secretary of state for Work and Pensions David Gauke and Joanne Segars, former chief executive of the Pensions and Lifetime Savings Association (PLSA).
A series of reports will be produced over the next two years on the challenges facing future generations of pensioners. Its main phase will conclude in summer 2025, with the provision of policy recommendations and options for reform.
This announcement came during the IFS’ report, Challenges for the UK pension system: the case for a pensions review, which warned that the future looks “risky at best” for many current workers hoping for a comfortable retirement.
This is due to the continued decline of defined benefit (DB) pensions in the private sector, the abolition of state earnings-related pensions, low interest rates, falling homeownership, low contributions to defined-contribution schemes, a collapse in pension saving among the self-employed and pension freedoms.
Success blinding us to risk
The IFS said that the current generation of pensioners is doing better than its predecessors. It reported that for the first time in history, since 2009, the average income of pensioners has been similar to that of those under state pension age and that pension poverty rates are lower than the population average.
However, it also warned that “this success may be blinding us to the risk that future generations will not fare as well”.
The report’s findings highlighted a number of current pension challenges, including that many employees are saving very little for retirement, as 60% of middle earning private sector employees who are contributing to a pension are saving less than 8% of their earnings.
Nearly 90% of them are saving less than the roughly 15% of earnings. Almost all of this saving is being made into defined contribution (DC) pensions, leaving the savers, rather than their employers, exposed to risks that may be difficult to manage well.
The IFS also found that fewer than one-in-five of the growing number of self-employed workers are saving into a pension, compared with around a third when the Pensions Commission last reported. The decline in pension membership amongst the self-employed is greatest among those who have been self-employed for a long period.
Expensive, insecure, private rented accommodation
The report added that increasing numbers of people approaching retirement are living in “expensive, insecure, private rented accommodation”, the report revealed.
At age 65, only 3–4% of those born in the 1930s and 1940s lived in private rented housing, compared with 6% for those born in the 1950s and with an estimated likely 10% for those born in the 1960s.
The IFS said that unless a wave of inheritances leads to rising homeownership, this percentage could be even higher for younger generations, leading to a combination of a low standard of living in retirement and/or greater reliance on housing benefit.
The research firm review pointed to consequences of the higher state pension ages introduced too, stating that the higher these rise, the harder it will be for people to remain in paid work until that age. It said that among those with low levels of formal education, 43% of men and 46% of women in their late 60s are disabled. It reported that the latest increase in state pension age to 66, led to the income poverty rate of 65-year-olds more than doubling.
Another issue identified was the pressure on public finances as a result of demographics, with 24% of adults currently over state pension age, a figure projected to rise to 27% by 2050 and to 30% by 2070. The report referred to the Office for Budget Responsibility (OBR) estimate of a rise in state pension and pensioner benefit spending to 9.6% from 5.6% of national income by the early 2070s – an increase equivalent to £100bn ($124bn, €113bn) a year in today’s terms.
In addition, the report warned that those retiring with DC pension pots “face considerable difficulty and risk in managing their finances through retirement”, due to running out of resources or being too cautious, resulting in a “needlessly austere” retirement.
Complacency of policymakers
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. Most private-sector workers are left having to manage considerable risks – not least over how long their retirement will be – which for many will be incredibly difficult to balance well.
“And an increasing number are likely to spend their retirement in relatively expensive, and less secure, private rented accommodation which will have adverse consequences for both retirement living standards and the government’s housing benefit bill.
Sleepwalking into the next pension crisis
Catherine Foot, director of Phoenix Insights at the Phoenix Group, said: “The UK is continuing to sleepwalk into the next pension crisis, with widespread under saving among those in the mid stages of their life. We have less than 10 years before this really starts to bite, so we need to make the right policy decisions soon to improve the prospects of retirement living standards.
“We warmly welcome this review from the IFS. It will provide a comprehensive assessment of the pension landscape and offer recommendations for policy reforms that will improve outcomes for the future generations of pensioners.”
Tom Selby, head of retirement policy at AJ Bell, said: “Pensions, and particularly the tax system linked to pensions, have been subjected to incremental and often incoherent reform since Lord Adair Turner’s Pensions Commission delivered its final report in 2006. Given that Commission’s findings were published 17 years ago, we are long overdue a deep assessment of how the UK retirement system is working as well as any reforms that could help improve financial resilience.
“While auto-enrolment is not perfect – in particular the issue of pensions adequacy and how to scale up contributions needs to be addressed – it has stood the test of time in large part because politicians broadly agreed it was necessary to begin addressing chronically low retirement savings levels in the UK.
“We now need a similarly consensual approach to be taken on the issue of pensions taxation and wider retirement-savings policy. Overwhelming complexity and having to deal with constantly moving goalposts undermines confidence in pensions and risks putting people off engaging altogether.
“This IFS review could potentially form the basis for a more sensible, long-term approach to pensions taxation, with the aim of making the rules easier to understand and encouraging more people to save for their financial future.”
Louise Davey, director of regulatory policy, analysis and advice at The Pensions Regulator, added: “As this important report points out, there’s work to do to ensure people save enough for retirement and savers are supported to make good decisions about their pension savings. We look forward to supporting the development of any industry-led solutions that help ensure people have financial security in retirement.”
