Finance Innovation Lab chief executive Jesse Griffiths says the new Pensions Commission is a “significant step forward” – but, he argues, the lack of policy direction on long-term ESG issues is a major oversight.
The government’s promise to undertake the biggest review of the UK’s pensions system in 20 years has taken a significant step forward with the launch of a Pensions Commission to explore how to improve pensions ‘adequacy’, and help the millions of people who face insecure, low-income retirements under the current system.
Most people expect their pension to provide a decent, secure income throughout retirement, but as the government recognises, that expectation is not being met.
The government must confront the staggering inequality at the heart of the pensions system. Despite automatic enrolment, 45% of working-age people are saving nothing. According to the Office for National Statistics, the poorest half of the population holds just 1% of UK pensions wealth, while the top 10% holds over two-thirds.
Meanwhile, the £50bn in annual pensions tax relief overwhelmingly benefits higher-rate taxpayers – a deeply regressive use of public money.
The government must confront the staggering inequality at the heart of the pensions system… The commission must aim for a progressive system that guarantees everyone a decent standard of living in retirement.
The Pensions Commission must aim for a progressive system that guarantees everyone a decent standard of living in retirement, regardless of income, race, gender, or disability. That means focusing on the people currently most at risk of poverty in old age.
Achieving a minimum retirement living standard
The Institute for Fiscal Studies (IFS) has recently concluded its own review and identified sensible, necessary low-hanging fruit: extending automatic enrolment to everyone over 16; requiring employer contributions regardless of employee earnings or contributions; and making it easier for the self-employed to save. Any government serious about adequacy should adopt these as a baseline.
However, even with these reforms, the IFS estimates that 6% of today’s 25–34-year-olds still won’t reach the minimum retirement living standard set by Pensions UK. That represents millions of people who, despite working and saving, face insecurity in old age.
The goal must be that no one fails to meet the minimum standard, and everyone has a real chance of reaching the moderate retirement living standard. This will mean increasing contribution levels - but in a way that benefits low earners most. That could include boosting employer contributions focused on an absolute minimum level, rather than a percentage, learning from the Living Pension standard.
The government must also do more to support people with disrupted work histories – those facing illness, unemployment, or caring responsibilities – who can’t save consistently. Reforming how the tax system supports saving will be critical here. These are the people who should benefit most from public spending to support pension saving – not those who are already well-off.
Once-in-a-generation chance to fix systemic flaws
The state pension will remain crucial for millions unable to save enough, especially since reforms take years to take effect. Right now, it falls well below the minimum income standards and lags behind many European counterparts.
The triple lock has cross-party support for good reason: it is a mechanism for achieving this desired level. It must remain in place for some time if we are to achieve basic adequacy for future pensioners.
Another major systemic flaw is how the current system individualises risk. Under the now-default defined contribution (DC) model, individuals must manage complex investment and longevity risks themselves.
A once-in-a-generation pensions review must be more than a technical exercise. We need a system that guarantees a decent standard of living for all, shares risk collectively, and uses public resources to reduce inequality.
This is especially daunting for those with limited savings, leading to insecurity and systematically disadvantaging lower earners. The government should prioritise systems that collectivise risk, such as collective DC schemes, or remove it from individuals entirely, like defined benefit schemes.
In this context, the government must be ambitious. A once-in-a-generation pensions review must be more than a technical exercise. We need a system that guarantees a decent standard of living for all, shares risk collectively, and uses public resources to reduce inequality, not entrench it.
Finally, there is a striking omission from the current scope of the commission: it fails to acknowledge the greatest long-term threat to pensions, which is unchecked climate change and environmental destruction. Our retirement savings continue to accelerate this through billions of pounds of investment in fossil fuels and companies linked to deforestation.
Security and prosperity in retirement depend on having enough money to live on, but also a planet we can live on.
At Finance Innovation Lab, we’re working with the growing Better Pensions Coalition to develop proposals for a genuinely progressive pensions system that helps to build a thriving, low-carbon future with decent retirements for everyone. If you have ideas or want to collaborate on building something better, we’d love to hear from you.
Jesse Griffiths is chief executive officer at Finance Innovation Lab.
