Be bold, new Pensions Commission urged

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As the government kicks off its long-awaited review of pensions adequacy with the creation of a new Pensions Commission, industry commentators have called on it to be “brave and bold” in its recommendations. The commission is due to report in 2027.

The Department for Work and Pensions is setting up a new Pensions Commission, almost 20 years after the Turner Commission recommended auto-enrolment, to examine the pension system as a whole and “look at what is required to build a future-proof pensions system that is strong, fair and sustainable”. 
 
The new commission will examine why future pensioners will likely be poorer than current pensioners and make recommendations for change, especially for those on the lowest incomes and at the greatest risk of poverty or undersaving.  
 
A commission has long been called for by the pensions industry, but just four months ago, pensions minister Torsten Bell told off industry representatives at a conference for asking for a pensions commission on various topics, saying: “This is not some fluffy 2004, ‘Let's have a pension commission’... this whole technocratic notion that we can take the politics out of it, I'm afraid there's people living in la la land.” 
   
     
The mood music in government appears to have changed since then. 

“People deserve to know that they will have a decent income in retirement – with all the security, dignity and freedom that brings. But the truth is, that is not the reality facing many people, especially if you’re low paid, or self-employed,” said work and pensions secretary Liz Kendall. “The Pensions Commission laid the groundwork, and now, two decades later, we are reviving it to tackle the barriers that stop too many saving in the first place.”  
 
The new commission will be formed by Labour peer Baroness Jeannie Drake, who sat on the Turner Commission, former Barclays UK chair and ex-CEO of Kingfisher Sir Ian Cheshire, who now chairs the board of the Institute for Government, and public policy expert Professor Nick Pearce, who leads the Institute for Policy Research at Bath University. They will ask a wide range of stakeholders for views. 

Their proposals for long-term change will build on the government’s Pensions Investment Review and the pension schemes bill, according to the DWP. 

Alongside the new commission, the government has also launched the State Pension Age Review, required by law, commissioning two independent reports. Suzy Morrissey, deputy director of the Pensions Policy Institute, a former civil servant in New Zealand, will report on factors the government should consider relating to state pension age, while the Government Actuary’s Department will produce a report on the proportion of adult life in retirement

The government has published a policy paper assessing the UK pensions landscape, including the progress made in the two decades since the first Pensions Commission.  

Several DWP research papers also out today found that retirees in 2050 are likely to receive 8% less in average private pension income than those retiring today, and 14.6m people, especially higher earners, are undersaving for retirement compared to their working age income. Nearly half (45%) of working age adults save nothing at all into a pension.  
 
Just one in four lower earners save into a pension, according to the DWP, while more than 3m self-employed do not save for retirement and only a quarter of those from a Pakistani or Bangladeshi background are saving into a pension product. 
 
The DWP has finally also refreshed its first gender pension gap analysis from 2023. The research out today suggests a staggering 48% gap in uncrystallised private pension wealth between women and men in 2020-22 - £81,000 for women and £156,000 for men. The gap is up from 35% in 2018-20.  
 

Consensus and long runway seen as preconditions for raising contributions 

 
The pensions industry has been calling for higher minimum auto-enrolment contributions for some time, with several organisations suggesting 6% employer and 6% employee contributions. More recent proposals want to stagger contribution levels according to income, to protect low earners from oversaving.  
 
Legislation has been brought in to extend auto-enrolment to 18 to 21-year-olds and to scrap the qualifying earnings threshold based on recommendations from 2017, but this has never been implemented. Outright contribution increases have been resisted by successive governments for being unpalatable to employers and possibly also to individuals struggling to pay their bills. 
 
A commission could create consensus and give a long runway to prepare for such politically difficult change. 
 
“As we look to the next decade and beyond, finding a consensus across business, government and our society on how to support people to save by building on the Mansion House reforms can create a pathway to a better future,” said Rain Newton-Smith, chief executive of the Confederation of British Industry, saying only growth can lead to better futures. 

“Taking the time to review the best pathway to achieve this, whilst pursuing broader measures to support growth, will be needed to make it affordable for employers and workers and crucial to the aim of rising living standards, now and in retirement,” she added. 

General secretary of the Trades Union Congress Paul Nowak said too many people - especially women, black and minority ethnic, disabled workers and the self-employed - are shut out of the workplace pension system. 

“We now have a chance to build on that work [by the Turner Commission] by reaching a long-term consensus on extending auto-enrolment to those workers still missing out and making sure that this system delivers the decent retirement incomes all workers need,” Nowak said. 
 
Pensions industry representatives have welcomed the news but are urging the commission to be bold and make recommendations regardless of whether they are palatable to the government, such as auto-enrolment contribution hikes.  

Provider Aegon wants to see increases to auto-enrolment contributions for many, and more people saving into a pension, including through implementation of the 2017 recommendations. 
  
“To really move the pension dial, we are calling for the new Pension Commission to make bold, brave and possibly unpalatable recommendations to the government, such as implementing significant increases to auto-enrolment contributions during the next parliament for those on mid and higher incomes,” said head of pensions Kate Smith. 
  
Smith added: “We’re disappointed there is no mention of the 2017 reforms to auto-enrolment. Implementing these could go some way to removing pension inequalities. As widely expected, the government has ruled out any increase to auto-enrolment contribution rates this parliament. Employers may be pleased about this given April’s increase in National Insurance contributions, but the reality is that without higher pension contributions, mandated or voluntary, many people could face a bleak retirement.” 
  
Bell said earlier this month that auto-enrolment rates would not change this parliament.  
 
    
Pensioners will be pleased that there will be no change to the triple lock during this parliament, said Smith. The Office for Budget Responsibility recently estimated the triple lock to be three times more expensive than originally projected. 
   
   
Damon Hopkins, head of DC workplace savings at Broadstone said: “We face a huge retirement adequacy problem with profound social impacts following the OBR’s recent warning that low pension savings could lead to a greater reliance on the government to support pensioners via a benefits system which is already unaffordable.”   

He said the government will need to be wary of the financial burden on employers when bolstering employees’ financial resilience, and suggested employers should start planning for increases in their cost base now.  

Higher contributions must become the norm, with more people brought into saving, argued Julian Mund, chief executive of pension fund association Pensions UK. 

“We are currently undertaking research to explore how building more flexibility into the automatic enrolment system might deliver better outcomes overall, as an input to this work,” he said. 

Laurence O’Brien, a senior research economist at the Institute for Fiscal Studies, which made numerous recommendations for pensions reform over the past two years, welcomed the commission.  

However, he believes that “any reforms to boost pension saving must be carefully targeted to minimise falls in take-home pay among those who can least afford them.”  

The suggestions that higher pension contributions could be detrimental for lower earners but that stepped contribution levels complicate the system risks becoming a new blocker of reform.

Any change to auto-enrolment will need much more nuanced rules than at present to accommodate different individuals’ situations, “but that then defeats one of auto-enrolment’s greatest strengths – its simplicity”, warned Matthew Arends, head of UK retirement policy at Aon.  

“The same challenge awaits the Government Actuary in relation to the State Pension Age review – a figure that applies to all UK citizens by age group.  Moreover, with the balance tipping in years to come towards fewer working age citizens and an increasing pensioner population, SPA will become a significant tool in managing the overall cost of the state pension for taxpayers.”  

State pension age changes have already helped to manage the cost of the state pension, but the ageing of the large ‘baby boomer’ generation means the retiree population will bulge for several years before reducing again, while high rates of economic inactivity, low birth rates and restrictions on immigration also mean the worker to pensioner ratio is set to worsen.
 
The research reports are available here: 

What recommendations are you hoping the Pensions Commission will make? 

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