Long ReadApr 27 2023

Gauke and Darling: how to improve financial security in retirement

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Gauke and Darling: how to improve financial security in retirement
It is estimated that fewer than one in five self-employed people are currently saving into a pension (Photo: BrianAJackson/iStock)

How much to put aside for retirement is one of those issues that many working age people do not like to think about very much.

With the last seven years dominated by Brexit, dealing with a pandemic and recovery from it, supporting households and businesses with energy bills and the cost of living crisis, it is also fair to say retirement saving has not been front and centre in the mind of policymakers either.

While there was a lot of policy action on pensions around the turn of the century and also between 2010 and 2016, the last time there was a major review of our retirement saving system was back in 2005, when Lord Turner’s Pensions Commission reported.

To a great extent many of the pillars of our system have survived from those proposals: automatic enrolment of most employees into workplace pensions; rises in the state pension age; and a more generously indexed flat-rate state pension.

Alistair Darling is a former chancellor of the exchequer (Photo: Russell Cheyne/WPA Pool/Getty Images)

But the world has changed a lot in the almost two decades since that review: a financial crisis, a pandemic, record low interest rates and falling investment returns; growth in self-employment; falling home ownership; stagnating earnings; and stalling life expectancy — none of which were anticipated in the mid-2000s. A thorough review of the UK pensions system is needed — and now.

Why now? The problem with pensions and policies affecting them is that the world moves slowly. New policies that affect the pension saving of a 21-year-old in 2030 will still affect the living standard of retirees at the turn of the next century. Modest increases in saving behaviour among younger people will also do more to boost their retirement incomes than for those in their fifties.

Be ahead of the game

This all means that you need to be ahead of the game. You need to see the problems coming down the track and try to address them sooner rather than later. You cannot tell a 65-year-old to go back in time and save more for their retirement when they were 45.

Given this need for clear and careful thinking, we are delighted to be advising the Institute for Fiscal Studies and the Abrdn Financial Fairness Trust on their new “Pensions Review”, which has just been launched. The independent, apolitical IFS is an obvious choice to take on this work. Importantly, its broad expertise – not only in pensions, but on public finances, tax, welfare and other areas of public policy – needs to be drawn upon to think about the multiple challenges the retirement saving system faces.

You cannot tell a 65-year-old to go back in time and save more for their retirement when they were 45

So what are these the problems that the Pensions Review has identified as threatening the retirement incomes of future generations of pensioners? Broadly there are three.

The first regards how much people are saving for retirement. The success of auto-enrolment in getting many more employees saving into pensions has not translated into them saving much of their salary. Most private sector workers with a pension are putting in between 5 per cent and 8 per cent of their pay (including what their employer puts in).

Very few — around 10 per cent of private sector employees — are putting in the roughly 15 per cent of salary that the Pensions Commission thought might be appropriate when it crunched the numbers in the mid-2000s. And one big and growing section of the workforce — the self-employed — is not covered by auto-enrolment, with fewer than one in five self-employed people saving into a pension.  

Other forms of savings matter, most importantly housing. While most of the focus on falling homeownership has been on people in their twenties and thirties, the fraction of older people living in the expensive, insecure private rental sector is rising too.

For those born in the 1940s, only 4 per cent of 65-year-olds lived in private rented accommodation. For those born in the 1950s, it is 6 per cent, and looks likely to be 10 per cent for those born in the 1960s. Unless a wave of inheritances cascades down to younger generations (specifically to those who do not already own a home), the fraction facing significant housing costs even in retirement could be higher.

Spending on pensioners set to rise

The second problem is the limited ability of the state to help out more than it already does. Spending on state pensioners and benefits for pensioners together currently takes up about 6 per cent of national income. Under current policy, that is set to rise to 10 per cent of national income in 50 years’ time.

David Gauke is a former work and pensions secretary (Photo: Andy Rain/EPA-EFE/Shutterstock)

In today’s terms, that increase in spending is equivalent to £100bn a year. That is a little more than double the amount (£48bn) the government currently spends on defence. This public finance pressure is therefore substantial, and much more so if you think about the additional NHS and long-term spending likely to be demanded by an ageing population. 

The third key issue is that outside the public sector, most pension arrangements no longer automatically provide a regular income from retirement to death. Many people used to turn their pension savings into a regular income by purchasing an “annuity” from an insurance company, but since 2015 you do not have to do so.

This means that retirees have the opportunity to be flexible in how they use their pension savings, which, given very low annuity rates, many people approaching or reaching retirement have welcomed. But it means that retirees have more personal responsibility in how to manage their money, which could result in some people spending their pension savings either too fast — or too slowly — than might be advisable.

These are only some of the challenges that lie ahead. We are delighted that the Pensions Review will take up the mantle and make proposals for a better way forward. The final conclusions and recommendations will come early in the next parliament, a perfect time for the next government to introduce new legislation to improve financial security in retirement. 

Alistair Darling is a former chancellor of the exchequer and David Gauke is a former work and pensions secretary. Both are members of the steering group of the Pensions Review.