With the Pensions Commission relaunched this week, the Institute for Fiscal Studies’ Jonathan Cribb outlines three focus areas from the institute’s recent two-year pension system study.
The government has this week launched a revived Pensions Commission, tasked with investigating the adequacy of retirement outcomes for future pensioners. This cannot come soon enough.
There have long been concerns that, with minimum contributions worth only 8% of earnings over around £6,000, although most people will manage to meet minimum income thresholds in retirement (such as Pensions UK’s minimum retirement living standard), a significant minority of middle and high income people will see large falls in their standard of living in older age.
What should the government do? My colleagues and I at the Institute for Fiscal Studies (IFS) have been working on this for the past two years. We think that there are three key reforms needed to mark the next stage of automatic enrolment and to sure up the pension system for current workers.
First, we think that too many employees miss out on an employer pension contribution because they are not eligible for automatic enrolment or because they feel the need to opt out, often for affordability reasons. A better system would broaden private pension participation, so that almost all employees (except those earning below a very low level, such as £4,000) receive at least a 3% employer pension contribution irrespective of whether they themselves contribute.
Based on evidence from the US, a small number of employees would stop contributing, but most would still pay in. And many more people would benefit from employer contributions.
Second, while the flat-rate state pension means that low-income people do not see big drops in their income late in life, many middle- or high-income people face a big shock if they don’t save more than the minimum.
We think that minimum default pension contributions should rise, in particular for middle and high earners. This would mean that more saving is done at points in people’s lives when they are most able to do so. And compared to across-the-board increases in contributions, the take-home pay of low-earners would be protected.
Third, compared to all the help that employees get in saving for retirement, the self-employed get almost no help at all. We think this status quo is untenable.
While a variety of options exist, the way to engage almost all self-employed people is through the self-assessment tax system – making it easier for people to either choose to save into a nominated pension scheme, or even be automatically enrolled into one at the point of filling out the tax return. Pensions will not be right for all self-employed workers, but they should be much easier for people to access if they want.
These are three ideas for improving our system, meaning more people access pensions, and with more contributions made at the right points in people’s lives. Who knows where the government’s review will go, but I would suggest that they can pick up our proposals and run with them to improve retirement incomes for the next generation of pensioners.
Jonathan Cribb is an associate director and head of retirement, savings, and ageing at the Institute for Fiscal Studies.
