Jonathan Stapleton: Like the original in 2006, the new Pensions Commission will help build an evidence base and help to generate a consensus for improving the UK pensions landscape
The revival of the landmark Pensions Commission to examine why tomorrow’s pensioners are on track to be poorer than today’s and make recommendations for change has been widely welcomed.
Department for Work and Pensions (DWP) Analysis of Future Pension Incomes 2025 – also published today (21 July) – shows just how stark the problem is.
It said that some 43% of working-age people - equivalent to 14.6 million savers – are currently undersaving for retirement against their target replacement rate (TRR) before housing costs.
The TRR is the percentage of pre-retirement earnings – the average from age 50 to the state pension age – that the original Turner Commission believed an individual would need to replace to meet an adequate income in retirement.
It showed that some 13% of working-age people were also undersaving for retirement when measured against Pensions UK's minimum retirement living standard (RLS) – increasing to 73% undersaving for the moderate RLS and 91% undersaving for the comfortable RLS.
The analysis shows that, while auto-enrolment (AE) has meant that some 88% of eligible employees are now saving, up from 55% in 2012, total pension incomes for future retirees is projected to decline over the next 20 years compared to previous retirees – with private pension income for individuals retiring in 2050 projected to be as much as 8% lower than those retiring in 2025.
The 2017 AE Review
So – there is a problem to solve. And we have a report outlining the scale of the problem. But haven't we known this for a decade or more?
The 2017 review of AE – a review supported by a three-strong expert advisory group of Ruston Smith, Jamie Jenkins and Chris Curry – identified a number of problems with the system.
Importantly, it found current saving levels "risked a significant proportion of the working-age population not meeting their retirement expectations" – adding the current structure of AE also meant there were also gaps in coverage, in particular for those in low paid part-time jobs, younger workers and for a large proportion of the self-employed.
The 2017 review recommended the lower age limit for AE should be reduced from 22 to age 18 and that pension calculations should be from the first pound earned, rather than from the lower earnings limit – estimating these two measures along would bring an extra £3.8bn into pension saving annually.
These proposals were modest – with the 2017 review decided against proposing a change to the earnings trigger or any immediate action on contribution rates – and the timescales were long, with the then government saying its "ambition" was to implement these changes to the AE framework "in the mid-2020s".
In the end, it took a private members bill put forward by Jonathan Gullis – a bill that was only subsequently backed by the government – to get these two extensions to AE into law at all , with the Pensions (Extension of AE) (No. 2) Act 2023 receiving Royal Assent in September 2023.
But, while the extensions are now in law, the government hasn't yet consulted on specific implementation details – meaning there is no date as yet for the rollout of these measures.
And, while implementation of the 2017 reforms would be a solid step forward, it is also no secret that more would need to be done to solve the adequacy challenge.
Indeed, bodies such as the Pensions and Lifetime Savings Association (PLSA) – now Pensions UK – have long advocated for gradually increasing contribution rates to a combined employer/employee minimum of 12% from the current 8%.
Is a Pensions Commission needed?
So, the question is that, if we already know what needs to be done, do we really need another Pensions Commission to tell us exactly the same thing?
And if the government can't even make modest changes to AE, then what hope is there for more ambitious reforms of the kind that might be proposed by an independent Pensions Commission?
The fact is the government has little room to manoeuvre on pension reform. It is facing not only an incredibly tight fiscal outlook, but an employer backlash against its increase in employer national insurance contributions, from 13.8% to 15% in last October's Budget.
Getting through what would be seen as another hike in employer or employee costs would be incredibly difficult to do and it is unlikely that – in the current environment at least – any such measures would have cross-party support.
The Pensions Commission will submit its final report to the government in 2027. No doubt it will then take the government quite a while to respond to the report and even longer to put in place any recommendations it contains.
The DWP's terms of reference for the commission reflect some of these difficulties – noting it should look at proposals for change "beyond the current Parliament" rather, presumably, that changes that will take effect immediately.
It would be easy to say the government is looking to throw the whole issue into the long grass – putting off any reform until after 2030.
While the commission will buy the government some time, I don't necessarily think it is against reform.
But it does need broad political and stakeholder consensus – both which it lacks at the current time. Like the original in 2006, the new Pensions Commission will help build an evidence base and help to generate a consensus for improving the UK pensions landscape.
By the time the commission reports, there will have been a decade of delay on measures to improve pensions adequacy. While we all know what needs to be done, a Pensions Commission is the only practical way to get there.
Jonathan Stapleton is editor of Professional Pensions
