Fast-forward two decades and the government has revived1 the Commission — this time focusing on adequacy of pension savings (although concerns also remain about certain groups of the population not engaging with retirement saving). At the same time, the government has also launched the latest SPA review.
Why has the government done this?
Automatic enrolment can be considered a success to date, in terms of the policy bringing millions more into pension saving than had been the case when the Pensions Commission was originally formed in 2002. The duties on employers that were implemented over a decade ago were only a starting point and not intended to provide a financially secure retirement on their own.
The government recognises that if contribution rates do not increase, then private pension income for people retiring in 2050 could be 8% lower than those retiring this year – undermining a central measure of societal progress.
Around 40% of working age people are not on track to meet their target replacement income (approximately two-thirds of their pre-retirement income for an average earner) during their retirement, while approximately 75% are set to miss having a 'moderate' standard of living in retirement (estimated to be around £31,000 a year). These measures of adequacy do not include the cost of housing for pensioners, increasing numbers of whom are expected to be in rented accommodation or still paying off a mortgage during retirement, putting significant additional strain on pensioner incomes and the State.
These sobering statistics, aligned with the widespread shift from DB to DC pension saving for the majority of people who have pensions (at least in the private sector) and a minority of these taking regulated advice, or even guidance, at retirement, has led the government to act now.
The scope of the Pensions Commission
The Commission's terms of reference2 set out its scope which is to "consider the long-term future of (the UK's) pensions system, including:
- outcomes and risks for future cohorts of pensioners on current trajectories through to 2050 and beyond
- how to improve retirement outcomes, especially for those on the lowest incomes and at the greatest risk of poverty or undersaving
- the role of private pension provision and wider savings, building on the foundation of the State Pension, in delivering financial security in retirement and supporting those approaching retirement
- the long-term challenges of supporting an ageing population
- proposals for change beyond the current Parliament, that build on the measures in the Pension Schemes Bill and ensure Britain in the mid-21st Century delivers financial security in retirement through a pensions framework that is strong, fair and sustainable"
The Commission's final report is due in 2027.
The latest SPA review
SPA will increase to 67 between 2026 and 2028. As things stand, the next increase (to age 68) is due to take place in the mid-2040s, although with the government undertaking regular reviews of SPA, that increase is likely to be brought forward.
The government used the announcement of the Pensions Commission's relaunch to also confirm the latest (third) SPA review is being undertaken. Two reports have been commissioned — one independent report3 and one from the Government Actuary4. While these reports are separate to the work of the Pensions Commission, the findings from both reports may be shared with the Commission as it considers the longer-term future of the UK's pensions system.
Comment
The two stages of the Pensions Commission can be summed up as firstly seeking to increase the number of people saving for retirement and then looking at how to increase those retirement savings. The government has issued a policy paper on the revived Commission, which it has labelled as "finishing the job"5 and it's good to see the government recognising that automatic enrolment, while successful to date, has not fully resolved the problems considered by the original Pensions Commission two decades ago.
Independent Commissions are useful tools for governments that know they have to make difficult (and potentially unpopular) decisions, because their findings can be used to justify implementing those decisions. There is unlikely to ever be a good time to announce that pension contributions must increase, as both individuals and employers will inevitably have affordability concerns. However, this is a move that needs to be made.
Key to the success of these plans will be understanding how to increase levels of engagement in pension saving. The successful introduction of automatic enrolment relied on the power of inertia. That is unlikely to work going forward in terms of encouraging people to save more.
