The IFS launches a new pensions review
21 April 2023
The Institute for Fiscal Studies (IFS) launches a major new multi-year review of pensions in the UK and the future of financial security in retirement. The pensions review assesses what pensions policy and the economic environment mean for future retirees’ living standards, recommending reform options and is an extensive two-and-a-half-year project.
With many economic and policy changes occurring, the IFS believes there is now need for a major review into the pension system.
The review will focus on three key questions:
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are people saving appropriately for retirement, in terms of both the amount and the form of saving, and if not, how can government policies help?
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how should the state support people from late working life into and through retirement?
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do people require more assistance to use their wealth appropriately through retirement?
The IFS said:
‘‘This major review – the first since Lord Turner’s Pensions Commission twenty years ago – will assess future risks and determine what needs to be done to secure decent retirement outcomes for current working-age generations.
It may seem odd to launch such a review when the current generation of pensioners is doing better than any in history. But in a new report to launch the Review we warn that this success may be blinding us to the challenges facing future generations who are unlikely to fare anything like as well.
The collapse of defined benefit pensions, the end of annuitisation, very low levels of pension contributions, and much lower rates of owner occupation could combine to heap risks onto those retiring in the coming decades.
We need a major review of pension provision now in order to give us a chance of avoiding a future that looks much worse than the present.’’
The review and the first report was launched at a public event on 20 April 2023, held in Westminster and the policy team were invited to attend. Also reported were the six specific challenges for future generations of pensioners that threaten their living standards in retirement and which, without policy action, mean many are likely to face substantial financial difficulties in older age.
Key concerns and findings:
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many employees are only saving little for retirement. The IFS stated that almost a fifth of working-age private sector employees (around 3.5 million people) do not do any pension saving in a given year. This is particularly true of low earners who are below the threshold for automatic enrolment (AE). More concerning, most of those participating in a pension save low amounts. Most of the savings are coming in the form of defined contribution (DC) schemes which can potentially leave individuals exposed to risk
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fewer than one-in-five self-employed workers are saving in a pension. The IFS recognises that this is particularly concerning given the growth in self-employment and that the decline in pension membership among the self-employed is greatest among those who have been self-employed for a long period. In addition those who do save in a pension often save low amounts that remain fixed in cash terms over a number of years
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increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation. The IFS reports, that at age of 65, only 3 to 4% of those born in the 1930s and 1940s lived in private rented housing, compared with 6% for those born in the 1950s and with what looks likely to be 10% for those born in the 1960s. This share could be even higher for younger generations, leading to a combination of a low standard of living in retirement and greater reliance on housing benefit
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higher state pension ages are a coherent response to the challenges of increased longevity at older ages, but they pose difficulties for many and longevity improvements have not been as big as predicted a decade ago. The IFS reports that the higher state pension ages rise, the harder it will be for some to remain in paid work until that age. Among those in their late 60s, 35% of men and 40% of women are disabled. These rates rise to 43% and 46% respectively for those with low levels of formal education. A higher state pension age also pushes up income poverty rates among those in their mid-60s, in part because the working-age benefit system is less generous than the support available for pensioners. For example, the increase in state pension age from 65 to 66 led to a more than doubling of the income poverty rate for 65-year-olds
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the demographic and other pressures mean that spending on state pensions and other benefits for pensioners is already projected to rise by £100 billion a year by 2070, with even bigger increases in health and social care spending. The IFS claims that if the state pension age is increased as legislated, the share of adults over the state pension age is projected to rise from 24% today to 27% in 2050 and 30% in 2070. The most recent projections from the Office for Budget Responsibility (OBR) state spending on payments to pensioners are to rise from 5.6% to 9.6% of national income over the next 50 years; this increase is equivalent to £100 billion a year in today’s terms. The UK is, however, in a better fiscal position on this issue than many western European countries, with less public spending on state pensions and more favourable demographic trends
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those retiring with DC pension pots face considerable difficulty and risk in managing finances through retirement. The IFS draws that the rising prevalence of DC pensions, combined with pension freedoms, means that many will be able to draw their pension flexibly through their retirement. There are risks of running out of private resources or of being so cautious as to end up suffering a needlessly stern retirement. While pension freedoms do give people the opportunity to take control of their own finances, even for the most numerate the decisions on how to draw on their pension wealth through their retirement are difficult.
The IFS said:
‘‘Throughout the project, a key cross-cutting theme will be the risks facing savers and pensioners regarding their standard of living in retirement. With the demise of private sector defined benefit arrangements, of state earnings-related pensions and of annuities, individuals are increasingly bearing all the risks associated with accumulating saving for retirement, and with decumulating their pension pots through retirement, in a way which was not true in the past.’’
The IFS’s findings will be published throughout the following two years, with the first main report in Autumn 2023. Key findings and recommendations for pensions reform will be broadcasted at launch events in London and Edinburgh in early Summer 2025. The launch of the IFS final report, which will include specific policy recommendations and options, is planned for early Summer 2025.
Read the full version of the launch report here and you can find out more about the review here.
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