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Recommendations from the government-backed Pensions Commission are not due until next year. But its interim warning that at least 15 million Britons are not saving enough for retirement already signals the scale of the challenge. The trend towards increasing longevity means that the issue of retirement incomes is unavoidable. At some point during the next decade, a threshold is expected to be reached whereby there are three pensioners for every 10 working-age adults.
The decision to reconvene this expert group was a good one. The automatic enrolment system it proposed has been a success, with around 90% of eligible employees signing up since 2012, along with their employers. But millions of low-paid workers, as well as the vast majority of self-employed people, face an uncertain future unless they too are helped to plan and save. One suggestion, made by the Institute for Fiscal Studies (IFS) as part of its own pensions review, was that HM Revenue and Customs could oversee a system whereby self-employed taxpayers would be enabled to make pension contributions at the same time as paying their tax bill.
Of the system’s three pillars – auto-enrolment, the state pension and voluntary individual saving – the commission judges the last to be the weakest. One issue is whether people are saving enough to top up their state pension (currently £241.30 a week or £12,547.60 a year) to a level at which they will be satisfied with their income. Another is how these additional savings are managed. Since no one knows exactly how long they are going to live, or what their needs will be, decisions can be difficult even for financial experts. The report implies that changes made under the Conservatives and designed to boost pensioner freedoms were ill-advised. UK retirees have far greater flexibility than their peers in most countries, and those withdrawing lump sums are at risk of running down their savings too quickly. A rebalancing towards a more cautious default is likely to be among next year’s recommendations.
Inequalities of various kinds also require addressing. The gender pensions gap is far larger than the pay gap, with women approaching retirement holding half the savings of men on average (a median figure of £81,000 versus £156,000). The commission has rightly indicated that policies to tackle this disparity will be a priority. While the retirement age has now been equalised, women’s greater longevity means that the average woman needs to support herself through retirement for longer than the average man. Some ethnic groups are also overrepresented among those with inadequate savings.
The commission’s remit excludes the triple lock, which is used to uprate the state pension, and this report ignores it. Any change to the current system is highly unlikely during this parliament. But it is worth noting the IFS’s view that were the pension age to be raised again, as a way of reining in costs, this would disproportionately benefit the wealthiest pensioners who live the longest, while poorer pensioners would have their retirements further shortened.
The warning of a savings shortfall must be treated seriously. Pensioner poverty has fallen in recent decades relative to poverty in other age groups and must be prevented from climbing up again. But the success of auto-enrolment is a reason for cautious optimism about what comes next. Unlike the impasse over social care funding, the pensions system has shown a capacity to adapt.
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