“We need a major review of pension provision now in order to give us a chance of avoiding a future that looks worse than the present.”
This is the stark warning that closes the executive summary of the IFS paper ‘Challenges for the UK pension system: the case for a pensions review’.
For those of us who spend our lives working with pensions and pension schemes, the points raised in the initial paper are likely to ring true, with some key aspects noted below:
- Many employees are not saving enough for retirement, with a fifth of working age employees not saving at all. The vast majority (87%) save less than 15%, a common benchmark for appropriate contributions.
- Most private sector employees are in DC schemes, with about 10% in DB schemes. While DC schemes offer more flexibility, asking individuals to manage their retirement income with the uncertainty of future investment returns and life expectancy is complex even for the most numerate individuals.
- An increasing trend is for retirees still to have mortgages, or be living in rented accommodation, adding additional pressure to the level of retirement income they need to generate.
- Many employees will struggle to stay in paid work until they reach the rising state pension ages, especially those in more physical jobs who are more prone to having longstanding health conditions by their mid to late 60s.
Full details can be found at https://ifs.org.uk/publications/challenges-uk-pension-system-case-pensions-review
The Pension Review
The IFS are working with the abrdn Financial Fairness Trust to provide recommendations for reform; of course, this is not binding nor government policy but it will certainly attract attention. The initial paper they published was front age news in a lot of the UK press.
Preliminary findings will be published over the next two years, with the first main report expected in Autumn 2023. Along with the IFS team they have a steering group of Alistair Darling (former Chancellor of the Exchequer), David Gauke (former Secretary of State for Work and Pensions) and Joanne Segars (former CEO of the Pensions and Lifetime Savings Association).
While we will await and review the outcomes of this paper with interest, pension policy changes can be slow moving and are likely to involve significant decisions about tax burdens and intergenerational fairness. While the IFS review is underway we may have a change in government, and the politicians making the decisions may well have their own views on the best way to address retirement income.
As the report highlights, decent retirement planning needs a holistic approach. Pensions are a key aspect, but so is housing, savings, potential inheritances, and the balance between private and public provision. This can be highly complex, and is a reason why having access to a personal financial advice service for members in both DC and DB pension schemes helps make sure those approaching retirement make the most of their money.
For those advisers who no longer offer DB advice, they should ensure that these plans are reviewed by a qualified adviser. It may well be that taking the DB income is the best solution for the client, and this can be identified quickly for little cost with an abridged advice process. However, for some clients, it may be that there are better options with their DB pension; partial transfers, annuity purchase or full drawdown may help members better manage their retirement priorities and this should be explored for every retiring client.