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Pensions are in desperate need of reform - this is how the next government should do it

Rocio Concha, Director of Policy and Advocacy at Which?

Rocio Concha, Director of Policy and Advocacy at Which? | Which?

4 min read Partner content

It’s never too early to think about retirement, so the old adage goes. The more you’re able to save now, the more you can do when you stop working.

The introduction of auto-enrolment in 2012 to help more workers save with the help of their employer has been a success, meaning millions more employees are contributing to a workplace pension. Yet despite that success, many are facing challenging retirements.

Analysis by the economic think tank Resolution Foundation found that around two-in-five working age people, which is some 13 mil people, aren’t saving enough to meet the minimum target for an adequate retirement income of at least two-thirds of their pre-retirement income. 

The Pension and Lifetime Savings Association calculated that a single person needs £14,400 a year to meet the minimum retirement living standard, £31,300 annually for a moderate standard and £43,100 a year for a comfortable standard. 

To tackle this undersaving, minimum contribution rates need to increase. In the wake of the worst cost of living crisis in recent times, expecting squeezed working households to put more money away every month might seem impossibly far-fetched. 

But just as minimum contributions went up steadily over the years since auto-enrolment was introduced, further increases need to happen incrementally over time. Instead of shying away from a huge societal problem, the next government must set out a clear timetable for increasing saving rates, giving businesses and employees plenty of time to adapt.   

In the shorter term, Which? believes that whichever party takes power on 5 July, there are three cost-effective things that should be done to support savers to have better standards of living in retirement. 

The first is to review the amount savers are charged for the administrative costs associated with their pension funds, now that those approaching retirement are more likely to have defined contribution pensions and need to choose how and when they use their pension savings. With default drawdown products expected to come in in the next few years, Which? believes this needs to include a fee charge cap with a clear pricing structure to make sure savers are protected. 

Another challenge to overcome is that people are working more jobs in their career than previous generations. The employee who joined a company after finishing their education and gave decades of service to the same firm until their sixties is a dying breed. The consequence of a workforce that jumps between jobs is more pension pots to keep track of. 

These smaller pots - built up over a year or two of employment early on in one’s career, say - may get lost and are an administrative burden for the pensions industry to deal with. 

Which? is calling for the next government to bring forward legislation to enable the automatic consolidation of small, deferred pension pots. The process should be automatic unless the member wants to opt out.

The biggest shake up to pensions, however, will be the introduction of pension dashboards. These dashboards will place all of savers’ pension information, including their state pension, in one place. Which? research has found low awareness among consumers about what they’ve saved and what this could be worth in retirement - and it’s burdensome to piece individual pots together manually. For instance, fewer than three in 10 people knew or guessed that the average amount people get from the state pension is around £150 a week or £7,800 a year.

Failure to implement dashboards could, like the deferred small pots issue, mean a huge number of pensions simply get lost - but on a much greater scale. The Pensions Policy Institute estimated the value of lost pension pots was £26.6 billion in 2022 and this is growing every year. That’s people’s hard-earned money simply sitting unused, with potentially significant consequences for their standard of living. The delivery of dashboards has been beset by delays that simply cannot persist. 

Workers deserve a comfortable retirement after decades of employment. But on current trajectories, not nearly enough savers will get to enjoy the fruits of their labour. The next government must set about changing that, giving workers the best possible chance of an adequate retirement. 

Rocio Concha is Director of Policy and Advocacy at Which?


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