The future of UK pensions “looks risky at best” for many current workers hoping for a comfortable retirement, according to a new report published today by the Institute for Fiscal Studies (IFS), launching the Pensions Review in partnership with the abrdn Financial Fairness Trust.
The new Pensions Review – Challenges for the UK pension system: the case for a pensions review – will assess future risks and determine what needs to be done to secure decent retirement outcomes for current working-age generations, said IFS.
“For the first time in history, since 2009 the average income of pensioners has been similar to that for those under state pension age. Pensioner poverty rates are lower than the population average. And more employees are saving into workplace pensions than ever before. These are all big policy successes,” the Institute noted.
However, 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 typical contributions to defined contribution (DC) schemes, and a collapse in pension saving among the self-employed, the IFS argued.
The introduction of pension freedoms has given savers flexibility but it means there is no longer the same degree of longevity-risk-sharing that DB pensions and annuities provide, it added.
“Individuals, rather than employers or insurance firms, now bear the burden of the risk of poor investment performance and uncertain lifespan,” it said.
The report identified several areas of concern:
- many employees are saving very little for retirement;
- fewer than one-in-five of the growing number of self-employed workers are saving in a pension;
- increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation;
- higher state pension ages 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 demographic and other pressures on the public finances are already considerable;
- those retiring with DC pension pots face considerable difficulty and risk in managing their finances through retirement.
Led by three directors at IFS – Jonathan Cribb, Carl Emmerson and Paul Johnson – the Pensions Review will produce a series of detailed reports over the next two years on these challenges facing future generations of pensioners, with its main phase concluding in summer 2025 when IFS will provide concrete policy recommendations and options for reform.
Johnson 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.”
He added: “A fresh look at the UK retirement saving environment is long overdue.”
Sangita Chawla, managing director at Standard Life, said: “The current pension system is under growing strain with a number of long-term pressures starting to build. As things currently stand many younger and midlife workers are at risk of missing even the PLSA’s [Pensions and Lifetime Savings Association] minimum standard of living in retirement with the self employed and those who are likely to be renting in retirement especially vulnerable.”
She noted that there were “difficult discussions to be had” regarding the scope of the state pension, which is the “bedrock of most people’s retirement”, at a time when the public purse is under huge scrutiny.
“The IFS’s Pensions Review has the potential to help build the consensus needed to reform the UK pension system, added Phil Brown, director of policy at People’s Partnership, provider of The People’s Pension.
He said that this research added to the growing body of evidence showing that the majority of British workers are under saving for retirement. “What’s currently missing is a societal consensus on how we reverse that trend,” he added.