The new Pensions Commission has issued an important interim report that could signal a stark warning for pension planning.
The first Pensions Commission was established back in 2002 and over the following four years developed a range of proposals covering:
- The creation of a low-cost occupational pension scheme into which individuals would be automatically enrolled;
- Reforms to the State pension system to reduce means-testing; and
- Systematic increases to the State pension age (SPA) to reflect rising life expectancy over time.
Those recommendations have since been largely implemented, changing the nature of retirement provision for millions of people.
Last summer, the government announced the launch of a second Pensions Commission, tasked with examining what changes are needed to the UK’s pension system in an economic and employment environment, which is significantly different from the pre-iPhone era of the Pensions Commission Mk 1. As is often the case with major government commissions – including the original Pensions Commission – there was a suspicion that the government was using an arm’s-length group to de-politicise a difficult message about costs and benefits.
The new Pensions Commission has just published a 190-page interim report, ahead of making final recommendations next year. The main points the interim report makes are:
- The controversial triple lock basis for State pension increases has brought the full new State pension to around 30% of median full-time pay, a target of the first Pensions Commission. By implication, increases could now slow down.
- While the flat-rate State pension plays a foundational role in retirement, more is needed from earnings-linked private pension savings to help people achieve a decent standard of living after they stop work.
- Although the UK’s SPA is not low by international standards, the UK is an early retiring nation, with an average age for leaving the labour market lower than many international counterparts.
- Using an updated version of the original Pensions Commission’s target replacement rates for retirement income, around 43% of the current working-age population (15 million people) are under-saving. ‘Generation X’ (born 1965–1980) are projected to have the worst outcomes, a finding echoed in other recent research.
- Only 17% of the self-employed currently save into a pension, a proportion which falls to just 4% for those who earn only from self-employment.
The Commission’s likely main conclusion in 2027 will be that a phased increase is needed to the minimum contributions for auto-enrolled pensions. If you do not want to fall into the 43% of under-savers, think about raising your own contributions now.
The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested.
