The Institute for Fiscal Studies has launched a wide-ranging review of the pensions system, looking at whether people are saving enough and if more support is needed for people to use their funds appropriately.
The Pensions Review is a multi-year project from the think-tank that will look into the consequences of current pensions policy, the economic environment and individual behaviour for living standards in retirement.
The goal is then to provide recommendations for reform to “improve outcomes for future generations of pensioners across the UK”.
IFS director Paul Johnson said a fresh look at the retirement saving environment was "long overdue".
The UK is continuing to sleepwalk into the next pension crisis, with widespread undersaving among those in the mid stages of their life.
Catherine Foot, Phoenix Insights
He added: “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.”
The IFS has said that a review of pensions needed to happen now to give people a chance of “avoiding a future that looks much worse than the present”.
This is due to the decline of defined benefit pensions, low interest rates, falling homeownership and low typical contributions to defined contribution schemes.
The review will centre on three key questions:
Are people saving appropriately for retirement, in terms of both the amount and the form of saving, and if not, how can government policies help?
How should the state support people from late working life into and through retirement?
Do people require more assistance to use their wealth appropriately through retirement?
Preliminary findings will be published over the next two years, with the first main report expected in autumn 2023. Key findings and recommendations for reform are then expected to be published in early summer 2025.
The review is led by three IFS directors – Jonathan Cribb, Carl Emmerson and Johnson – and will also benefit from the advice of a steering group composed of Alistair Darling (former chancellor of the exchequer), David Gauke (former work and pensions secretary) and Joanne Segars (former chief executive of the Pensions and Lifetime Savings Association).
Not saving enough
The report, published on April 20, highlighted that many employees are saving very little for retirement, with 60 per cent of the middle-earning private sector employees contributing to a pension currently saving less than 8 per cent of their earnings.
Nearly 90 per cent are saving less than the 15 per cent of earnings that the Pensions Commission, published in 2004, thought more appropriate. Added to this is the fact that fewer than one in five self-employed workers are saving into a pension.
Percentage of employees in auto-enrolment target group participating in workplace pensions, split by sector
Note: eligible employees only. Source: Department for Work and Pensions (2022d)
There are also concerns that those retiring with DC pension pots face considerable difficulty and risk in managing their finances through retirement.
The report stated: “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.”
In addition, falling homeownership rates mean increasing numbers are reaching retirement living in private rented accommodation rather than as homeowners.
Only 10 per cent of those born in the 1960s are estimated to be living in private rented accommodation by the time they reach 65 years old, but the IFS said this rate could be expected to double over the next decade.
‘Vital’ to focus on future generations
Phoenix Insights director Catherine Foot said it is “vital” that the retirement income prospects of future generations are taken seriously.
She said: “The UK is continuing to sleepwalk into the next pension crisis, with widespread undersaving 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.”
Louise Davey, director of regulatory policy, analysis and advice at the Pensions Regulator, said: “More people are saving into workplace pensions than ever before.
“However, 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.
“Our focus continues to be on promoting a well-functioning system which delivers value for savers, and we look forward to supporting the development of any industry-led solutions that help ensure people have financial security in retirement.”
This article originally appeared on FTAdviser.com
