The government has been urged to take "decisive" action and introduce a four-point pension guarantee, after the Institute for Fiscal Studies' (IFS) pension review suggested that "serious problems" remain for the next generation of pensioners.

As its review of the pension system draws to a close, the IFS, in partnership with Abrdn Financial Fairness Trust, shared its final report outlining a comprehensive roadmap for reform, which is aimed at addressing "serious challenges" facing the UK pension system and "substantial risks" to the finances of future generations of pensioners.

The report identified a number of issues that need to be addressed, including pressure on public finances from an ageing population; many workers failing to save enough to have an adequate income through retirement; and increasing numbers of older people living in more expensive, insecure, private rented accommodation.

To help address these concerns, the IFS encouraged the government to adopt a four-point pension guarantee, covering a number of issues around the state pension, decumulation and means testing.

In particular, the IFS emphasised the need for the government to boost private pension saving in a targeted way, noting that around 20 per cent of private sector employees, and 80 per cent of self-employed workers, are not saving in a private pension.

However, it acknowledged that many working-age individuals are struggling with low incomes now, so it is important that any changes minimise the potential for lower take-home pay for those already on a low income.

Given this, the review did not support proposals for across-the-board increases in default minimum automatic enrolment contributions.

Instead, it called for an end to the practice where employer pension contributions only have to be made if the employee also contributes, emphasising that all employees (aged 16–74) should receive at least an employer pension contribution worth 3 per cent of their total pay.

It also recommended that the government increase minimum default total pension contributions under automatic enrolment in particular for those on average earnings and above.

The IFS suggested that the government should also look to introduce new mechanisms to facilitate pension saving by the self-employed, such as integrating pension contributions into Self Assessment tax returns.

In addition to this, the IFS found that savers require more support in retirement, arguing that there are several steps the government can take to help savers facing complex decisions over their, often numerous, pension pots.

In line with this, it encouraged the government to expand the automatic consolidation of small, deferred pension pots, especially for those approaching (or above) the state pension age.

It also called on the government to facilitate and encourage flexible but protective default retirement income products, such as ‘flex then fix’ approaches combining the flexibility of ‘drawdown’ earlier in retirement with the security of annuities (which provide a regular income for life) at older ages.

In addition to this, it said that government should ensure people can access high-quality information and support without having to pay for expensive and ongoing financial advice, along the lines of the Financial Conduct Authority’s recent proposals for targeted support.

The IFS also stressed the need for the government to improve the level of confidence in the state pension, suggesting that the government should choose a target level of the new state pension as a fraction of economy-wide average earnings.

The government could then use the current ‘triple lock’ to reach that target, and then move so that the state pension would rise in line with average earnings growth once that target is met.

The IFS also argued that the state pension should always grow at least as fast as inflation, however, suggesting that whilst this could temporarily cause the state pension to be above target, a similiar approach could be taken to Australia, meaning that the state pension would then continue to rise in line with inflation until it returns to target.

In addition to this, the IFS encouraged the government to commit to never means-testing the state pension.

It also said that while the state pension age should rise as longevity at older ages rise, it should rise by less than those increases in longevity.

In addition to this, the IFS called on the government to improve means-tested support, suggesting that specific focus is needed on ways of boosting take-up rates of means-tested support.

Commenting on the recommendations, Pensions Review Steering Group chair, David Gauke, said: “The final report from the IFS’s review comes at the perfect time with the government’s own review expected to commence imminently. Pensions need long-term planning and, ideally, a broad consensus.

“The proposals put forward maintain an important balance between the state, employers and workers.

"The government should provide a secure pension income, further increases in the state pension age should be accompanied by more support for those hardest hit, and both employees and employers should gradually contribute more to help achieve greater financial security in retirement.’

IFS director and co-director of the review, Paul Johnson, also emphasised that whilst there is much to celebrate about the current UK pensions system, there is a risk that policymakers have become complacent when it comes to pensions.

“Without decisive action, too many of today’s working-age population face lower living standards and greater financial insecurity through their retirement,” he stated.

“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. Taken together, they would create a pension system fit for the next generation.”

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