Dr Priya Khambhaita: Delaying focus and action on adequacy risks pushing solutions beyond the point of meaningful impact for many in work today.
The latest of the PPI's regular columns takes a look at the results of the latest PPI pensions framework report.
The Pensions Policy Institute (PPI) pensions framework is a unique and comprehensive measuring tool with forty-one indicators across various domains including housing, income, health, and employment.
The framework tracks and simulates how the UK pension system is performing against a set of core objectives – adequacy, sustainability, and fairness. For the first time since its inception in 2022, the pensions framework's measurement ‘wheel' has undergone a comprehensive refresh. The renewed data on indicator performance allows for an improved understanding of trends and challenges, including the impact of demographic shifts, changes in employment patterns, and the effectiveness of policy measures.
This analysis is timely given the incoming legislation and evolving regulatory landscape within the UK pensions policy arena, which highlights the urgent need for robust and up-to-date evidence to inform policy and implementation.
The latest framework report also focuses on barriers, enablers, and shortcomings within the system as experienced by different generational groups. The report examines the key differences in how various generations approach retirement planning, explores the factors behind these disparities, and discusses potential strategies to improve retirement outcomes for everyone.
Adequacy and fairness remain weak
When comparing the 2022 and 2025 framework wheels, there has been no material change in how the pension system is performing to meet its key objectives. Adequacy and fairness continue to be the weak components of the framework, with the gap between sustainability and adequacy increasing. Since 2022, only three out of the forty-one indicators have improved to show stronger support for the system's goals, while three have declined.
The indicators that have improved in rating are home ownership, fiscal sustainability, and scheme sustainability. Housing affordability has improved since the peak of the affordability ratio during the Covid-19 pandemic. With fiscal sustainability, trends in spending in relation to national insurance contributions (NICs) and GDP suggest that measures designed to improve sustainability are beginning to take effect. With scheme sustainability, the increase in members brought about by automatic enrolment has boosted the scale of defined contribution (DC) schemes. Overall, schemes are well funded with most defined benefit (DB) schemes in surplus.
Notably, of the three income indicators that have been downrated, one of the shifts includes a real-terms fall in retirement income — a critical measure of adequacy. Since 2020/21, there has been a reduction in net incomes such that 2022/23 incomes (the latest full-year data) were at around the same level as 2017/18 incomes in real terms.
The DC rates indicator remained steadfast with a rating of level two – showing that performance for this indicator is poor in terms of support for adequacy.
Current minimum contribution rates mean many retirees will not have the DC assets they need. The reform agenda so far has focused on improving investment returns and stimulating economic growth. However, savers can only benefit from investment performance if they are consistently building sufficient pension pots. Missed opportunities for early and sustained saving mean the focus must now shift decisively toward adequacy. Even then, the effects of reform may take decades to materially improve retirement outcomes.
Priority policy action
In terms of the priority policy action required for each group, Baby Boomers require support on how best to convert their pension pots into a sustainable retirement income.
For Generation X, key priorities include increasing contributions during the remaining accumulation years, maximising investment returns, and using dashboards to better understand and manage their retirement readiness.
Millennials need to have confidence in strong investment returns through value for money in accumulation, higher contribution rates, and easy-to-use dashboards for managing pensions.
Generation Z needs support to enter the labour market and obtain secure jobs – essential for inclusion in the pension system. Alongside this, contribution rates that lead to adequate replacement rates will be crucial to help them accumulate sufficient retirement funds over their working lives.
While policy change takes time, delaying focus and action on adequacy risks pushing solutions beyond the point of meaningful impact for many in work today. This is likely already the case with the Baby Boomer group and older Generation X.
Dr Priya Khambhaita is head of policy research at the Pensions Policy Institute
