Rachel Reeves, the UK’s Chancellor is expected to announce an update of the UK workplace pension system in her speech at Mansion House later this month. The review will look at issues like auto-enrolment and state pensions, as well as pension savings by self-employed people.
The review is a response to Labour’s proposals from last July. The review will now proceed, despite initial plans being delayed because the Chancellor’s Budget included tax increases that worried businesses.
Reeves, according to two sources familiar with the plan , is planning to announce the commission in her speech on 15 July. According to reports, she believes that reforming workplace pensions is long overdue. The system needs to be modernised to address challenges.
It is expected that the government will review reforms in auto-enrolment. Currently, employees are required to contribute a minimum of 3 percent to their earnings over PS6,240 per year, and a minimum of 8 percent to their earnings. It is likely that the review will also examine the state pension. This currently amounts to PS230.25 per weekly, or PS11,973 for those who have 35 years of national insurance contributions.
Retirement income shortages are a concern
The Institute for Fiscal Studies has warned against the risk of financial instability in retirement due to the current pension system. The IFS, in its final report on the Pensions Review called for “decisive actions” to modernise this system.
In the report, it was stated that “the UK pension system has seen major improvements in recent decades.” There are still serious issues for the next generation. “The current generation will enjoy fewer of the benefits of generous pensions with defined benefits, home ownership and rising prices.”
The review concluded, “The Review has identified a variety of issues which need to be addressed, including: pressure on the public finances due to an ageing population, many workers not saving enough to provide an adequate retirement income, including most self-employed people, complex decisions about how to manage and draw from pensions during retirement, and an increasing number of older people who live in expensive and insecure private rented housing.”
Paul Johnson, Director at the IFS and codirector of the Pensions Review said: “There are many things to celebrate with the current UK pensions systems.” On average, the current generation of retirees are doing better than previous generations. Pensioner poverty has dropped significantly from the high levels of the 1970s and 80s. It is also below the level for other demographic groups.
Johnson warned against complacency and said that “too many people” in today’s population of working age will be left with financial insecurity, resulting in a lower standard of living during retirement.
Reform of workplace pensions likely to affect businesses and workers
The IFS report made specific recommendations for the government. Johnson said, “Our recommendations provide a clear, affordable roadmap for the government: bolster the state pension; help workers save more, but only when they’re better positioned to do so; and help individuals make the most out of their pension pots during retirement.
These recommendations are likely to be included in the scope of the upcoming review. The review will also be focusing on changes to auto-enrolment, which may have implications for employers who are required to pay increased contributions.
IFS believes that it is important to ensure that an increase in the saving requirement does not put undue strain on employees during times of financial hardship. The review could explore flexible approaches that allow for higher contributions in periods of strong financial performance.
