The UK Government is undertaking a ‘once in a generation’ reform of the pensions system. In this major paper, we explain that while the reforms are moving in the right direction, they may not be radical enough to address key failings in the UK pensions system.
We examine the state pension, which is among the lowest in Europe. Despite some improvements in pensioner incomes, many pensioners remain in poverty and rely on social security to reach a minimum income. The retirement age is rising to a point that many lower-paid workers will never reach, or at best will reach only briefly. The UK pension system relies on occupational and personal pensions to plug the retirement income gap. However, high-quality Defined Benefit (DB) schemes are being replaced by Defined Contribution (DC) schemes, which depend on investment performance and shift risk from employers to workers, who are least equipped to manage it.
We make a series of recommendations on the state pension, occupational pensions and how pension funds invest our pension contributions.
The simple solution of creating a simple state pension system is sadly not practical, and we have costed the options for doing so. This means that solutions will have to retain a mix of state and occupational pensions. However, that does not mean we cannot make meaningful changes to create a better and fairer pension system. These include strengthening the state pension and resisting increases in the retirement age that are not justified by life expectancy or health inequalities.
Major reforms are needed to occupational pensions, including a return to more DB schemes, fair increases in contribution levels, and reforms to auto-enrolment. Pensions also offer much more to the economy than retirement income. They should be a powerhouse for the economy by investing in a better life for workers who are making increasing contributions. We support the drive to scale up and strengthen incentives for UK investment, underpinned by responsible investment policies.
The paper’s author, Dave Watson, concludes;
“The key message of these reforms is that there is no single solution. Pensions are complex, and the costs involved need to be shared across the state, employers and workers. They also need to be applied more fairly across income groups, with better governance and responsible investment. We also need to look at the whole picture, rather than treating pensions as an isolated policy issue. That includes occupational, personal and state pensions, as well as related issues such as health inequalities, housing, wages, the gender pay gap, ending bogus self-employment and social security.”