Last week the government announced The Pensions Commission will be reformed to focus on solving pensions adequacy.
At the Pensions and Lifetimes Savings Association’s – now Pensions UK – conference in March, pensions minister, Torsten Bell, ruled out this approach.
In this Pensions Expert news story, Nick Reeve reported Bell saying people who thought a “technocratic” approach to solving adequacy issues were “in la-la land”.
Bell now argues the much-lauded Pensions Commission − which reformed the state pension and created auto-enrolment in the early 2000s − left the job ‘half done’. The Commission is being brought back to life to complete the task, he added.
Future poverty
There are plenty of issues to address. The biggest is the concern we will see a generation plunged into poverty on retirement because they their DC pots are inadequate.
Over the past two years, the Institute for Fiscal Studies has been carrying out its own pensions review and published its report earlier this month.
It said: “Our findings suggest that almost 40% of private sector employees saving in a defined contribution pension are on course to miss the target replacement rate benchmark, implying that they will face a significant drop in living standards when they retire. This corresponds to around 7 million people.”
Contributions too low
The principal cause of this pension inadequacy is current contribution levels are too low.
As I wrote in this feature for Professional Pensions in 2022, the original Pensions Commission carried out analysis which concluded around 16% of their salary needed to be saved to have a comfortable retirement.
But the Commission instead set contribution levels at 8%, with the idea individuals could choose to pay into extra.
According to Steve Webb, this lower level was to satisfy the Confederation of British Industry (CBI).
The CBI was so worried future governments would ratchet up employer contributions, they insisted the 3% figure be put in the Act of Parliament to make it harder to change.
It’s now more than a decade since auto-enrolment was rolled in the UK and we have seen no evidence that DC members of making significant extra saving – they assume 8% will be enough.
With Bell ruling out any increases in pension contributions this parliament, it’s not obvious this significant policy mis-step will be corrected. Let’s hope the Pension Commission pushes for this vital change and is allowed to complete the job this time.