The Institute for Fiscal Studies (IFS) has published the final report of its Pensions Review, drawing on research conducted over the past two and a half years.
Among the reforms suggested are removing the triple lock so that the state pension rises in line with average earnings growth, requiring all workers to receive an employer pension contribution, and improving means-tested support.
The IFS warns that for the next generation of pensioners, fewer will benefit from the advantages of generous ‘defined benefit’ pensions, high levels of homeownership, and rising house prices enjoyed by the current generation.
The review has identified a number of issues that need addressing including: pressure on public finances from an ageing population; many workers failing to save enough to have an adequate income through retirement – including most of the self-employed; complex decisions over how to draw on and manage pensions through retirement; and increasing numbers of older people living in more expensive, insecure, private rented accommodation.
The report sets out a series of recommendations in four main categories:
1. Delivering a secure state pension
The ageing population is putting strain on the state pension system and there is low confidence in how much the state pension will provide in the future, the IFS says. To address this, it proposes a pension guarantee with the following points:
- The government should choose a target level of the new state pension as a fraction of economy-wide average earnings (currently it is worth 30% of median full-time earnings). The government could use the current ‘triple lock’ to reach that target. But once that target is met, over the longer run the state pension would rise in line with average earnings growth.
- The state pension should always grow at least as fast as inflation. When earnings growth is below inflation, the state pension should therefore rise in line with inflation. This would temporarily cause the state pension to be above target. As is done in Australia, the state pension would then continue to rise in line with inflation until it returns to target.
The government should commit to never means-testing the state pension.
- The state pension age should only rise as longevity at older ages rises. But it should rise by less than those increases in longevity, meaning the average time spent receiving the state pension would still increase.
2. Boosting private pension saving in a targeted way
Around 20% of private sector employees, and 80% of self-employed workers, are not saving in a private pension. Of those employees who are saving in a defined contribution arrangement, almost 40% are set to miss a standard benchmark for an adequate retirement income. But many working-age individuals are struggling with low incomes now, so it is important that any changes minimise the potential for lower take-home pay for those already on a low income. The Review therefore does not support proposals for across-the-board increases in default minimum automatic enrolment contributions but instead recommends:
- Ending the practice where employer pension contributions only have to be made if the employee also contributes. All employees (aged 16–74) should receive at least an employer pension contribution worth 3% of their total pay.
- Increasing minimum default total pension contributions under automatic enrolment in particular for those on average earnings and above. This boosts private pension saving, but protects take-home pay in periods when individuals have low earnings.
- Introducing new mechanisms to facilitate pension saving by the self-employed, such as integrating pension contributions into Self Assessment tax returns.
The proposals boosting pension contributions from employers and employees would generate an additional £11 billion per year of private pension saving (£5 billion from employer contributions and £6 billion from employee contributions). Those on course for low-to-middle retirement incomes would see the biggest boost to their incomes – by an average of 13–14% – from these reforms.
3. Improving means-tested support
There have been significant rises in income poverty for people in their early 60s. The IFS says additional targeted financial support should be introduced to support those who are most harmed by increases in the state pension age. As well as helping those most in need, this should help build broader support for future necessary increases in state pension age. The Review recommends:
- Enhancing universal credit for people within one year of their state pension age, either for all on low incomes and assets (costing £600 million per year) or targeted towards those with health conditions (costing £200 million per year). These costs are less than one-tenth of the exchequer gain of around £6 billion per year from raising the state pension age by a year.
- For pensioners, the government should continue to focus on ways of boosting take-up rates of means-tested support. Housing benefit should be increased for pensioners living in the private rented sector, so that they are provided with support based on the local rents of (at least) a two-bedroom property (initially costing £150 million per year).
