Pensions adequacy review: from commitments to delivery

By Timothy Fassam , Director of Public Affairs at Phoenix Group

“We will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes...” (Labour Party Manifesto 2024)?

Labour’s commitment to review the pension landscape in its manifesto was broadly welcomed by the pension industry. In an open letter ahead of the general election, Phoenix Group, alongside other businesses, think tanks and charities, urged all political parties to commit to a holistic review of pension saving adequacy in the next parliament to address widespread under-saving. Now the new Labour government is in power, a plan to deliver on this review is urgently needed.??

Urgent change to address saving gaps?

The under-saving crisis is bubbling beneath the surface in the UK with millions of people at risk of sleep walking into retirement. Research from Phoenix Insights, Phoenix Group’s longevity think tank, found around 14 million defined contribution pension savers are not on track for the retirement income they expect. (i)

Policy intervention is needed to tackle this challenge and Phoenix Group believes a review of pensions adequacy is long overdue and should be high on the to-do list for Sir Keir Starmer ’s government. This should cover both the private and state pension systems, and whether they are working in a complementary way to deliver good retirement outcomes.??

Questions around the long-term affordability of the state pension remain ongoing and its sustainability and fairness for all generations need to be factored in. The state pension age is set to increase to 67 from 2026 but the previous government had planned to review any further increases within two years of the next parliament. (ii)

Raising auto-enrolment minimum contributions?

In 2023, parliament passed a bill to lower the minimum qualifying age for pension auto-enrolment from 22 to 18 and abolish the lower earnings limit for contributions. This will support people to save more and help future generations kick-start their retirement saving sooner. However, we are currently waiting on a consultation on the timescale for implementation, and the clock is ticking on hitting the mid-2020s target. (iii)?

But we need to do much more. Auto-enrolment has been a successful policy in increasing pension participation over the last decade, but the current minimum contribution level is not sufficient for most people to achieve an adequate income in retirement. Minimum pension contributions have been fixed at their current rate of 8% for five years, so a plan to increase contributions when the economic conditions allow is critical and should form part of the pensions review.??

Recent Phoenix Group polling (iv) found seven in ten (71%) UK adults agree government should set out a plan to increase the minimum auto-enrolment pension contribution rate if it’s too low for most people to achieve an income they could live off in retirement.?

Cost of delay?

The cost of delaying action on this could have significant consequences. A recent report by Phoenix Group and WPI Economics suggested that a typical 18-year-old whose auto-enrolment contributions increased today from 8% to 12% could have almost ￡96k extra in their pension pot at state pension age. However, delaying this increase by five years reduces the total additional savings potential by nearly ￡10k. A 10-year delay reduces the additional savings potential by around ￡22k, and a 15-year delay lowers it by ￡35k.?(v)

It’s important we don’t overlook the saving crisis. Inaction and delays mean at best, people could lose out on achieving their expecting retirement income, and, at worst we could see increased strain on the social support system and a worsening of retirement poverty.??

We have an ageing society that is living longer on average than previous generations, so it’s crucial our pension system is set up to ensure people achieve an adequate income in retirement that might last more than 30 years. Phoenix Group hopes Labour’s commitment to review the pension landscape delivers on this goal.?

Tim Fassam is Director of Public Affairs at Phoenix Group , the UK’s largest long-term savings and retirement business, where he leads a team responsible for public policy and government relations. Prior to joining Phoenix, Tim was Director of Government Relations and Policy at UK wealth management trade association PIMFA - Personal Investment Management & Financial Advice Association , MD of Public Affairs, Policy and Research at TheCityUK and Director of UK Public Affairs at Prudential plc . He is also on the Board of Trustees at the International Longevity Centre - UK (ILC).?

This article was originally published as opinion former content on politics.co.uk on 18th July 2024

[i] Phoenix Insights (2022): Great Expectations: Are people’s retirement income expectations adequate and achievable

[ii] DWP (2023): State Pension age review 2023

[iii] DWP (2017): Automatic Enrolment Review 2017: Maintaining the Momentum

[iv] Phoenix Group research among 3,014 UK adults. Polling conducted by Public First February 2024. The results are weighted to Nationally Representative Proportions.

[v] Phoenix Group and WPI Economics: Falling behind the curve: The costs of delaying an increase in auto-enrolment contributions