Changes to UK pension system leaving savers 'exposed'

Widespread changes to pensions have improved financial sustainability, although they have also brought new challenges around adequacy and fairness, according to the Pensions Policy Institute's (PPI) first UK Pensions Framework report.

The PPI’s framework, sponsored by Aviva, found that changes in the UK pension system, including state pension reforms and the shift from defined benefit (DB) to defined contribution (DC), are having a net positive impact on sustainability.

However, it clarified that this remained sensitive to ongoing risks associated with population ageing, economic factors and economic inactivity, as well as system design issues relating to complexity and data.

The report also revealed a mixed picture in terms of adequacy, suggesting that the overall outlook is “somewhat negative”, given low levels of DC contributions among those who need more than the state pension in retirement, slow earnings growth, low financial resilience and limited support for decision-making.

Furthermore, although variation in the level of financial security people have in retirement is improving, the research revealed persistent differences in retirement outcomes, identifying several issues underpinning differences in the UK pension system.

In particular, the report raised concerns around the access that people have to different forms of retirement saving, the extent to which they are connected with their pensions and able or supported to make optimal decisions, the protection they have from risks in retirement, and widespread resulting income inequality in later life.

Although the report acknowledged that defaults such as automatic enrolment are helping to narrow saving divides in working life, it clarified that the lack of infrastructure to help people manage DC pensions through retirement may compound challenges around financial capability.

Given this, it suggested that there is a growing need for policy reforms to tackle pension adequacy, without compromising affordability and participation.

It also argued that system design has an increasingly important role to play in mitigating against the erosion of savings, warning that inconsistencies in system design could be producing tensions between the need for engagement and the need for defaults that can protect people from risks that might arise from low engagement.

Commenting on the report, PPI research associate, Anna Brain, stated: “Our findings show a clear pattern.

"Important and necessary changes designed to offset the impacts of population ageing and economic change in the UK pension system, such as the shift to DC in the private sector and the introduction of the new flat-rate state pension, are helping to improve sustainability by lowering the cost of providing pensions.

“However, they also leave people increasingly exposed to the growing likelihood that the income and savings they have may not meet their needs in later life, and the challenges people face are not felt equally.

“Although risks to financial sustainability have by no means disappeared, they are being somewhat superseded by risks to individuals of continuing income inequality in retirement and of under-saving, despite high levels of pension coverage.

"Across the population, more people are saving, but not necessarily saving adequately for later life.

“For many, challenges are also compounded by policy design, which has created a more straightforward state pension system but a more complex private pension system, with little support for difficult decisions that need to be made around how much to save or how to access savings.

““Not only does this report present a detailed portrait of adequacy, sustainability and fairness in the UK pension system today, it also provides a dynamic instrument and robust baseline against which ongoing changes, including those relating to the rapidly evolving macroeconomic events of 2022, can be compared over time.

“By linking factors from across the pension system and examining the relationships that exist between them, the analysis can also provide policymakers with a comprehensive insight into how each potential change might affect other elements of the system, and ultimately the experiences that people have in later life.”

Aviva UK Life CEO, Doug Brown, added: “At Aviva, we recognise the fundamental importance of the UK pensions system for our society.

"For the first time, we can now benchmark how the whole system, with all its complexities and trade-offs, affects savers and pensioners. As a sector, we must draw on the findings in this report and work together to ensure the right policies, support, and solutions are in place to help people navigate the system.”

Looking ahead, the UK Pensions Framework will look to consider the extent to which acute economic pressures of 2022 signal a departure from recent indicator trends to understand risks they present to saving in working life, adequacy in later life, the sustainability of public finances, stability of pension schemes, and living standards across the population.

The PPI will also examine the potential impact of decisions over future increases in state pension age, the uprating of benefits and the triple lock, the role of pensions tax relief and the long-term implications of challenges in health and social care for population health and spending.

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