Without decisive action, too many of today’s working-age population face lower living standards, the Institute for Fiscal Studies has said as it publishes the final report of its multi-year Pensions Review. The thinktank calls on policymakers to make employer contributions non-contingent, increase minimum contribution levels and set a target for the the state pension. 

The recommendations are the distilled results of a two-and-a-half-year project, sponsored by the – recently disbanded – abrdn Financial Fairness Trust, the IFS having produced numerous reports during that time.

The steering group of the thinktank’s Pensions Review was chaired by former work and pensions secretary David Gauke, who said: “The final report from the IFS’s review comes at the perfect time with the government’s own review expected to commence imminently.” 

The government will launch its own work on pensions adequacy as part of its own Pensions Review “shortly”, pensions minister Torsten Bell confirmed at a launch event for the report on Wednesday*. He highlighted inequality among pensioners, and pointed out that despite higher coverage, 45% of working age adults are not currently saving into a private pension.

However, he also reiterated the government line that there is too much focus on savings rates and not enough on investment returns and hinted at the burden on employers saying that many more workers now qualify for auto-enrolment because of minimum wage rises. 

Asked if the plan for auto-enrolment reforms that came out of the 2017 review could be implemented via an amendment to the current pension schemes bill, the MP for Swansea West said this will not be the case as it “needs doing properly”. 

A timetable is crucial, suggested LCP partner Sir Steve Webb, speaking at the same event. Given sufficient notice, businesses would accept change, he said. 

The former pensions minister also said there is a need for a more compelling narrative to tackle a long-term issue like pensions. 

There is never a strong ‘why now’ case for pension reforms, he said: “As a minister, the question is always, ‘What’s the burning platform?’”

The platform is not burning at the moment, but could catch fire if left without maintenance, the IFS argues. Paul Johnson, the outgoing IFS director, stressed that the UK pension system has improved but warned policymakers not to rest on their laurels. Without decisive action, many of today’s workers face financial insecurity in retirement, he said. 

“Our recommendations give government a clear and affordable roadmap: shore up the state pension, help workers save more – but only in periods when they are better placed to do so – and help individuals to make the most of their pension pots through retirement. Taken together, they would create a pension system fit for the next generation,” he said. 

The recommendations outlined in the report would bring an additional 5m employees into pension saving and boost retirement incomes for those on low-to-middle incomes, according to the abrdn Financial Fairness Trust.

A target needs to be set for the state pension, the researchers argue, so that it reaches a specified percentage of average earnings but is not increased beyond. This could open up an avenue to end the triple lock policy that has worked to improve the UK’s low state pension but is widely considered unsustainable in the long term, and risks becoming an expectation among retirees if it has not already become one. 

The IFS says the state pension should always increase by at least inflation, however, even if this means it is temporarily above target, and it should never be means-tested like the Australian state pension, the researchers argue.

A further recommendation is that the state pension age should rise in lockstep with longevity at older ages but by less than that, meaning the average time spent receiving the state pension would still increase. 

In the private pensions sector, the thinktank highlights that almost 40% of defined contribution savers are expected not to reach an adequate retirement income. Despite this undersaving crisis, the IFS is stopping short of recommending contribution increases for all, citing low working age incomes. 

Instead, it says all employees aged 16 to 74 should receive at least the minimum employer contribution regardless of whether they pay into the pension themselves, even though it acknowledges this comes with a risk that employees might reduce or stop their own contributions. Total auto-enrolment contribution levels should be increased for those on average earnings and higher, and the self-employed need to be given a mechanism to facilitate pension saving, the thinktank also recommends. 

In addition, the researchers want to see an expansion of the automatic consolidation of small pots for those approaching state pension age, flexible default retirement products such as ‘flex then fix’ and consumer help along the lines of the Financial Conduct Authority’s targeted support proposals. 

Further recommendations focus on enhancing universal credit a year before state pension age, and improve the take-up rate of means-tested benefits. 

The recommendations have been welcomed by the pensions industry.

Patrick Heath-Lay, chief executive of the People’s Partnership, said the IFS analysis highlights a central dilemma for pension reformers – how to raise overall pension saving to address the savings adequacy gap without forcing lower earners into saving too much, potentially reducing their standard of living.

“This issue – alongside the need to balance higher savings rates with the impact on employers – must be addressed in the second phase of the government’s pensions review,” he said.

Where people can afford to save more, their current DC contribution rates might be “misleadingly low for the retirement they expect”, commented Glyn Bradley, pensions board chair at the Institute and Faculty of Actuaries, saying a nudge for higher earners to contribute more would help narrow this gap.

“We also need to help people use their savings well, and that includes managing the uncertainty of how long they will live,” Bradley said, urging the government to focus on enabling multi-employer and retirement-only collective DC.

On state pensions, he said the IFoA shares the concern that increasing state pensions faster than both earnings and inflation over the long term is at odds with almost every other area of state spending.

“The triple-lock is often described as providing protection, but we need to consider whether its indefinite escalation is the best way to protect those in need of support across all generations. A long-term approach would be to set out what the affordable level of the state pension should be and how to maintain that relative to prices and earnings. This should help all members of society have confidence in the long-term sustainability of the state pension and the base that they can build their retirement planning on,” Bradley said.

Pensions UK - the rebranded Pensions and Lifetime Savings Association - has also welcomed the IFS report on pensions adequacy.

Policy and advocacy director Zoe Alexander agreed with the review findings that the state pension affords too little protection from poverty, the scope of auto-enrolment is too narrow, and auto-enrolment contributions are too low for most workers.

"If policymakers plan now and set out a roadmap for reforms, over the next 10 to 15 years a new framework could be implemented to substantially improve the prospects of the majority of savers,” Alexander said.

*this article has been updated to name the correct day on which the launch event took place