The government has revived the Pensions Commission to confront the reality that future pensioners are set to be poorer than pensioners today. Government analysis has found that individuals due to retire by mid-century are on course for 8% less private pension income than those retiring in 2025.
The commission – headed by Jeannie Drake, Nick Pearce and Ian Cheshire – will examine barriers preventing workers from saving enough for their retirement and recommend changes to better future-proof the pensions system, with a final report to be produced in 2027.
Yvonne Braun, director of long-term savings policy at the Association of British Insurers (ABI), said: “The Pensions Commission is a crucial opportunity to build on the progress of its predecessor 20 years ago, address the gaps and shape a new pensions settlement that endures for the long term.”
Issues identified include the fact that more than 3 million self-employed people are not saving into a pension and only one-in-four earners in the private sector are saving into a pension.
There is also a glaring 48% gender pensions gap in private pension wealth between men and women. The average woman can expect a private income worth £5,000 less than that of the average man.
The Pensions Commission was first established in the early 2000s to review the UK’s regime for private pensions and long-term savings. One of its most notable achievements was the introduction of automatic enrolment.
Rachel Vahey, head of public policy at AJ Bell, said: “While automatic enrolment has created 11 million new pension savers, many are saving the bare minimum.
“The demise of private sector defined benefit pensions and a levelling down of contribution rates by some private pension schemes have meant that, although there are more pension savers in the UK, they are not all saving enough.”
A potential solution the new commission can explore is introducing higher contribution rates, Vahey suggested.
However, following the increase in employers’ national insurance contributions last year, Vahey acknowledged that demanding employers to stick their hands in their pockets once more would be “deeply unpopular”.
Many low earners would also struggle to pay higher contributions out of a low disposable income hit by inflation, she added.
Potential ways around this would be to introduce measures like higher contribution rates depending on earnings, which Vahey said would move away from the “blanket minimum that applies to all eligible workers today”.
Julian Mund, CEO of Pensions UK (formerly the Pensions and Lifetime Savings Association), agreed that higher contributions “must become the norm”. The association is currently conducting research exploring how building more flexibility into the automatic enrolment system could deliver better outcomes overall.
This follows their recent research, which found that one in five working households are on course to fall short of the income needed to meet Pensions UK’s minimum retirement living standard.
Claire Trott, head of advice at St James’s Place, added: “To deliver in tackling the UK’s retirement savings gap, the commission must result in bold action. That means improving financial education, both in schools and through key life stages, so people can make timely, informed decisions.”
Alongside the re-establishment of the Pensions Commission, the government has also launched a state pension age review, which will be led by Suzy Morrissey.
The state pension age is already expected to increase to age 67 between 2026 and 2027 and is expected to hit 68 in the mid-2040s.
The new state pension age review could bring the latter increase forward to the late 2030s, Vahey suggested.
James Alexander, CEO of the UK Sustainable Investment and Finance Association, said: “The right reforms have the potential to generate large pools of pension capital, which could increase investment into private markets and the wider economy.”