The Institute for Fiscal Studies has issued a report in which it makes the case for a comprehensive review of the entire UK pension system

The Institute for Fiscal Studies (IFS) is a regular producer of briefings and investigations into various parts of the UK pension system, covering both the private and public sectors and state provision. It has just launched a wider review of the entire UK pension framework with the first report of a multi-year project. The intent is to produce a final report including specific policy recommendations and options in early Summer 2025. The timing is chosen to mark 20 years since the final report of the Pensions Commission (aka Turner Report) which kicked off auto-enrolment and increases to state pension ages (SPAs).

In this first report, the IFS highlights eight key findings, many of which have a familiar ring to them:

1. Many employees are only saving very little for retirement. Almost a fifth of working-age private sector employees do not make any pension saving in a given year. Even most of those participating in a pension save low amounts. 61% of the middle-earning private sector employees contributing to a pension are saving (with employer contributions) less than 8% of their earnings and 87% are saving less than the 15% which was the level that the Pensions Commission thought appropriate

2. Fewer than one-in-five self-employed workers are saving in a pension. This compares with around a third when the Pensions Commission reported. The decline in self-employed pension membership is greatest among those who have been self-employed for a long period (seven years or more). Even those who make pension contributions often save relatively low amounts that remain fixed in cash terms over several years.

3. Most private sector pension participation is in the form of defined contribution (DC) pensions which leave individuals bearing risks that are difficult to manage well. Relative to defined benefit (DB) arrangements, they do offer members much more flexibility, but at a cost of no risk-sharing with employers, other members or other generations. The fraction of private sector employees participating in a DB scheme halved from 24% in 2005 to 12% in 2020.

4. Increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation. At age 65, 6% for those born in the 1950s lived in private rented housing, compared with what looks likely to be 10% for those born in the 1960s. This share could be even higher for younger generations, leading to a combination of a low standard of living in retirement and greater reliance on housing benefit.

5. Higher SPAs 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 SPAs rise, the harder it will be for some to remain in paid work until that age. Among those in their late 60s, 35% of men and 40% of women are disabled (i.e. have a longstanding health condition that has a substantial negative effect on their daily life). The rates are higher still for those with low levels of formal education.

A higher SPA also pushes up income poverty rates among those in their mid 60s, in part because the working-age benefit system is less generous than the support available for pensioners. For example, the increase in SPA from 65 to 66 led to a more than doubling of the income poverty rate for 65-year-olds.

6. Demographic and other pressures mean that spending on state pensions and other benefits for pensioners is already projected to rise by £100 billion a year by 2070, with even bigger increases in health and social care spending. If the SPA is increased as legislated, the share of adults over the state pension age is projected to rise from 24% today to 27% in 2050 and 30% in 2070. The most recent projections from the Office for Budget Responsibility (OBR) are for state spending on payments to pensioners to rise from 5.6% to 9.6% of national income over the next 50 years; equivalent to £100 billion a year rise in today’s terms.

7. Those retiring with defined contribution (DC) pension pots face considerable difficulty and risk in managing their finances through retirement. The rising prevalence of DC pensions, combined with pension freedoms, means that many will be able to draw their pension flexibly through their retirement. But such decisions need to be made with care. Currently, a man aged 66 is expected to live for a further 19 years, but 13% can expect to survive until age 95; the equivalent figures for 66-year-old women are 21 years with 20% making it to age 95. There are risks of running out of private resources or of being so cautious as to end up suffering a needlessly austere retirement.

8. While current pensioners are still doing well on average, and many of the recommendations of the Pensions Commission have been successfully implemented, the future looks risky at best for many current workers hoping for a comfortable retirement. The last 20 years have seen:

• 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 average contributions to DC arrangements;
• the introduction of pension freedoms which offer flexibilities but reduce the extent of risk-sharing in retirement; and
• a collapse in pension saving among the self-employed.

In the IFS’s view this combination means a major review of pension provision is now needed to give the UK a chance of avoiding a future that looks worse than the present.

Comment

The Pensions Commissions is of the same era as the development of pensions simplification. The retirement and investment world has changed radically since then.

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