Sophia Singleton: There are a range of pension adequacy issues that need addressing head-on before they worsen
The latest of the Society of Pension Professionals’ (SPP’s) regular columns argues the delay to phase two of the pensions review presents government and the industry with a great opportunity to look at adequacy properly.
Last year the government committed to a major review into pensions adequacy with auto-enrolment (AE) likely to have featured heavily. However, it has been postponed with no firm indication of a likely timescale.
There is a wealth of evidence to suggest such a review is much needed, indeed, the Department for Work and Pensions' own research shows that 38% of working age people (equivalent to 12.5 million people) are not saving enough for retirement.
With regard to the minimum AE contribution rate, the previous government publicly acknowledged that "current statutory contributions of 8% on a band of earnings are unlikely to give all individuals the retirement to which they aspire" and the Labour Party 2024 General Election manifesto made a specific commitment to "build on the success of the auto-enrolment scheme".
Events and uncertainty
Unfortunately, events appear to have again conspired to further impact the chances of millions of people receiving a better retirement income.
The hostile reaction to tax raising measures in last year's Autumn Budget prompted the Chancellor to promise British businesses that she is "not coming back with more taxes". As such, the optics of changes to AE have become politically challenging and it was widely reported that phase two of the pensions review was delayed for this reason.
Cost vs investment
The SPP recognises that improving adequacy could mean a cost to employers when the economy remains fragile, a cost to individual savers whilst the UK is still enduring a lengthy cost of living crisis and a cost to the taxpayer in the form of tax relief on pension contributions. But these costs are also an investment. It is an investment that employees will get back at retirement, the tax relief is an investment that will in many cases result in reduced state benefit payments in the future and the investment for employers is in productive human capital that may also serve as an effective workforce management tool.
Alternatives
Of course, there are many ways that this could be achieved without imposing immediate additional costs on employers e.g. auto-escalation of contributions, deferring pay increases, selective introduction to new employees, agreeing a timetable and action plan for the future rather than now. These should all be considered as part of the review.
A golden opportunity?
Now might not be the right time to increase statutory contributions, but the delay presents government and the industry with a great opportunity to look at adequacy properly. One size does not fit all and so understanding what adequacy actually means and the forces that drive different groups towards inadequate retirement incomes will take time. This is why we need the review to commence as soon as possible.
Take for instance the difference between renters (around 20% of households) and homeowners (around two-thirds of all households). A recent report suggested 30% of people are now expected to rent in retirement – but in some areas, rents will cost 130% of people's retirement income. Similarly, a third of mortgage holders don't think they will pay off their mortgage by retirement age and so won't be able to rely on the state pension alone.
Issues like these need addressing head-on before they worsen. Likewise, according to the Institute for Fiscal Studies, relative pensioner poverty rose from 13% in 2011/12 to 16% in 2022/23 – equivalent to an increase of 300,000 pensioners – an adequacy review could and should grapple with these types of issues.
Agreeing a timetable for change will take time and that same timetable for change is likely to exceed a parliamentary term. Millions have already missed out due to successive governments delay and the longer this delay continues, millions more are likely to struggle in retirement. We need this review so that we can be honest with savers about what lies ahead and how government, employers and savers are going to close the gap.
Sophia Singleton is president of the Society of Pension Professionals and partner and head of DC at XPS Group
