Several key challenges are threatening the living standards of workers hoping for a comfortable retirement, according to the Institute for Fiscal Studies (IFS).
The past 20 years have seen the continued decline of defined benefit (salary-linked) pensions in the private sector and low typical contributions to defined contribution pension schemes, the IFS said.
The introduction of pension freedoms has given people flexibility over their retirement, but individuals, rather than employers or insurance firms, now often bear the burden of the risk of poor investment performances and uncertain lifespans, it added.
The IFS has launched a pensions review in partnership with the abrdn Financial Fairness Trust, a charitable trust which funds work to tackle financial problems and improve living standards for people on low-to-middle incomes.
It published a report on Thursday, which said: “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.”
The report added: “While current pensioners are still doing well on average… the future looks risky at best for many current workers hoping for a comfortable retirement.”
The review will produce a series of reports over the next two years on the challenges facing future generations of pensioners, with its main phase concluding in summer 2025.
At age 65, only 3–4% 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, the IFS said.
It added that, unless a wave of inheritances leads to rising home ownership, this percentage could be even higher for younger generations, leading to a disappointingly low standard of living in retirement and/or a greater reliance on housing benefit.
Higher state pension ages pose difficulties and longevity improvements have not been as big as predicted a decade ago, according to the report.
But it said pressures on the public finances are already considerable, with the Office for Budget Responsibility projecting state pension and pensioner benefit spending to rise from 5.6% to 9.6% of national income by the early 2070s.
Paul Johnson, director of the IFS, said: “The last decade or so has seen state and private pensions deliver much better outcomes for many pensioners.
“But there is a risk this has bred complacency among policymakers. Automatic enrolment has brought millions into workplace pensions, but all too often at much lower rates of saving than the Pensions Commission thought would be needed.
“Despite the number of self-employed people growing considerably, many fewer of them are saving in a pension. Most private sector workers are left having to manage considerable risks – not least over how long their retirement will be – which for many will be incredibly difficult to balance well.
“And an increasing number are likely to spend their retirement in relatively expensive, and less secure, private rented accommodation which will have adverse consequences for both retirement living standards and the Government’s housing benefit bill. A fresh look at the UK retirement saving environment is long overdue.”
Alistair Darling, pensions review steering group member and chair of abrdn Financial Fairness Trust, said: “Twenty years ago we set up the Pensions Commission, which laid out a range of important reforms including auto-enrolment.
“But today much has changed and the landscape is very different. Too many are saving too little for retirement.
“Many self-employed and those in insecure work don’t have a pension. Increasing numbers are living in the private rented sector, which will lead to higher housing costs in later life.
“Whilst today many pensioners are doing well on average and pensioner poverty has been cut drastically, we need a major review to avoid a future where too many won’t have enough to live on in their old age.”
Phil Brown, director of policy at People’s Partnership, provider of the People’s Pension, said: “The IFS’s pensions review has the potential to help build the consensus needed to reform the UK pension system.
“This research adds to the growing body of evidence showing that the majority of British workers are undersaving for retirement. What’s currently missing is a societal consensus on how we reverse that trend.
“We hope that the IFS’s review will help chart the path towards improving the nation’s financial resilience.”
A Department for Work and Pensions (DWP) spokesperson said: “Automatic enrolment has succeeded in transforming pension saving, with more than 10.8 million workers enrolled into a workplace pension and an additional £33bn saved in real terms in 2021 compared to 2012.
“We’re also supporting proposals to expand automatic enrolment, enabling millions to save more earlier. These changes will particularly benefit groups – including women, young people and lower earners – who have historically found it harder to save for retirement.
“Alongside this, the package of measures announced in January, including a consultation on ensuring pensions deliver value for money, will improve security and create better returns for savers, so they can enjoy the retirement they’ve worked so hard for.”