FTI Consulting UK Public Affairs Snapshot: Balancing the present and the future: Pension adequacy in Britain’s evolving retirement landscape
Pension policy has never been in the spotlight like it is now, with policymakers focusing on reforms to strengthen economic growth. While the macroeconomic impact of pension investment should be a priority, it is important that the Government also turns its attention to the growing crisis of pensions inadequacy.
The Pension and Lifetime Savings Association has suggested that without pension reform, more than 50 per cent of savers will fail to meet retirement income targets. This is not a distant crisis that the Government can close its eyes to for a few decades – the state pension is already costing the Government £138.1 billion in 2024-2025. Without adequate workplace pensions, the Government risks stretching its already over-extended welfare budget to tackle the retirement savings challenge.
The adequacy of workplace pensions has come into the spotlight because we are only now beginning to see people retiring with defined contribution (DC) only pension pots, with most of the private sector having moved away from generous defined benefit (DB) schemes long ago. A rise in phased retirement, the rising cost of living and an increase in life expectancy are all factors forcing policymakers to review and respond to the performance concerns of DC schemes.
The simplest way to make pensions work harder is to pay more into them. Automatic enrolment (AE) has led to a tenfold increase in total membership of DC occupational schemes in Britain since its introduction. However, while it is a widely agreed success, many are still under-saving for retirement. The former Conservative Pensions Minister, Guy Opperman, who was instrumental in the passage of the Pensions (Extension of Automatic Enrolment) Act 2023, was determined to push standard contributions from 8 per cent contribution to 12 per cent.
His objectives were mirrored by the former Work and Pensions Committee Chair, Stephen Timms, who stated that lifting AE contributions to 12 per cent must be a priority for the Government. Yet in the face of the cost-of-living crisis and low growth, mandating increased contributions from the employer, employee or both have been politically unpalatable. In fact, the changes in the 2023 Pensions Act of lowering the age of AE to 18 are yet to be introduced.
The new Pensions Minister, Emma Reynolds, will need to address this challenge of under-saving as the Government kicks off its year-long review of pensions. She will need to strike the balance of ensuring AE is providing adequate retirement savings, as well as remaining flexible to those managing higher living costs.
Maximising returns and ensuring there is enough investment risk taken at the right time to generate long-term growth is also necessary for ensuring DC pensions work effectively. The new Government has jumped head-first into this challenge with the surprise introduction of the Pension Schemes Bill, which seeks to provide pension savers with an additional £11,000 or more and deliver better outcomes.
The Bill details measures to consolidate small DC pots, automatically bringing small, deferred pots together in one place and reducing the number of loss-making pots that providers are currently required to manage. It will also introduce a standardised value-for-money test, which aims to ensure that DC pension schemes deliver good outcomes through a holistic and transparent value-for-money framework rather than a myopic focus on low costs.
The Bill’s proponents are clear in their aims. They hope the legislation will help tackle the retirement savings crisis through reducing costs, simplifying scheme management and improving investment returns. The challenge will be achieving consensus within industry, similar to that achieved by the Pensions Commission with its introduction of AE.
The final piece of the puzzle is ensuring pension savers are making informed decisions about how and when to spend their DC pot. With less than a quarter of the British public confident that they know how much they need to save for retirement, schemes need to improve the advice and guidance they provide.
The Pension Schemes Bill provides a strong start to improving outcomes for savers, but proposals must now reach beyond pot consolidation and decumulation defaults and home in on the need to increase savings levels. An easy win for the Government would be to enact powers under the 2023 Pensions Act to reform AE. But without swift action, the state pension burden will escalate, straining government finances and plunging the Prime Minister, Keir Starmer, into a retirement savings disaster.
The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
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