Chancellor Rachel Reeves is expected to announce a review of the UK’s workplace pension system during her Mansion House speech later this month. The review will examine issues such as auto-enrolment, state pension levels and pension savings among the self-employed.
The review follows proposals made by Labour last July. Although initial plans were delayed after the Chancellor’s Budget introduced tax increases that caused concern among businesses, the review is now expected to proceed.
Two sources with knowledge of the plan told the Financial Times that Reeves is preparing to launch the commission during her 15 July speech. She is reported to view reform of workplace pensions as long overdue, with the system requiring modernisation to address long-term savings challenges.
The government’s review is anticipated to assess reforms to auto-enrolment, which currently requires employees to contribute at least 8 percent of earnings above £6,240 annually, with a minimum employer contribution of 3 percent. The review is also likely to examine the state pension, which currently stands at £230.25 per week, equivalent to £11,973 annually for those with 35 years of qualifying national insurance contributions.
Warnings over retirement income shortfall
The Institute for Fiscal Studies (IFS) has warned that the current approach to pensions leaves many at risk of financial insecurity in retirement. In its final report from the Pensions Review, the IFS called for “decisive action” to modernise the system.
The report stated, “There have been major improvements to the UK pensions system in recent decades. But serious problems remain for the next generation of pensioners. Fewer will benefit from the advantages of generous defined benefit pensions, high levels of home ownership, and rising house prices enjoyed by the current generation.”
It continued, “The review has identified a number of issues that need addressing including: pressure on public finances from an ageing population; many workers failing to save enough to have an adequate income through retirement – including most of the self-employed; complex decisions over how to draw on and manage pensions through retirement; and increasing numbers of older people living in more expensive, insecure, private rented accommodation.”
Paul Johnson, Director of the IFS and co-director of the Pensions Review, said, “There is much to celebrate about the current UK pensions system. The current generation of retirees is, on average, doing much better than any previous generation. Pensioner poverty is way down on the very high levels in the 1970s and 1980s, and is indeed below that for other demographic groups.”
However, Johnson cautioned against complacency, saying that unless action is taken, “too many” of today’s working-age population will face financial insecurity and lower living standards through their retirement.
Workplace pensions reform likely to impact businesses and workers
The IFS report recommended specific actions for the government. Johnson explained, “Our recommendations give government a clear and affordable roadmap: shore up the state pension, help workers save more – but only in periods when they are better placed to do so – and help individuals to make the most of their pension pots through retirement.”
The upcoming review is likely to consider these recommendations as part of its scope. It will also focus on auto-enrolment changes, which could have implications for employers required to make increased contributions.
According to the IFS, a key issue is ensuring that any increase in saving requirements does not place undue pressure on workers during periods of financial difficulty. The review may explore flexible approaches to allow higher contributions during stronger financial periods.
