Reeves’ pension review pause could be ‘hugely detrimental’
Experts have slammed the chancellor’s decision to pause a review into pensions, saying failure to act could “leave millions of people at greater risk of an income shortfall”.
Rachel Reeves has reportedly shelved plans to reform pension adequacy in a bid to avoid piling more pressure on business.
The Financial Times first reported that it had been put on the back burner today over fears it would force employers to increase contributions to retirement pots.
This comes after Rachel Reeves’s tax raid Budget in October, which also included a £25bn rise in employers’ national insurance contributions.
Experts think this may be eventually passed on to workers, while raising fears about the burden placed on already struggling business. Before the election, Labour won the public backing of over 120 business chiefs – but the enthusiasm of those executives appears to have dimmed since then.
According to the FT, under the current rules for auto-enrolment, staff must pay eight per cent of earnings into their workplace pension. At least three per cent of which must be from employers’ contributions.
It is thought that such rates will leave Brits without sufficient retirement incomes. Phoenix Group predicted that a minimum auto-enrolment level of 12 per cent would mean an extra £10bn.
A Government spokesperson at the Department for Work and Pensions hit back, saying: “We are determined to ensure that tomorrow’s pensioners are supported, which is why the Government announced the landmark two-stage pensions review days after coming into office and why the Pension Schemes Bill was in the King’s Speech.
“The interim report of the first phase was published at the Mansion House event on 14 November and the final report will be published in the Spring.
“Government will set out more details on the second phase in due course.”
‘Delay will leave millions of people at greater risk’
AJ Bell warned today that delaying addressing the challenge of pension adequacy means “millions of Brits will be at greater risk of facing a crisis when they reach retirement”.
The investment platform’s director of public policy Tom Selby said: “Any review of adequacy would have to consider automatic enrolment minimum contributions which, in turn, would have raised the prospect of increasing those contributions and potentially the burden imposed on employers.”
He said: “The foundations of pensions are also shaky, and delaying meaningful action to address these problems will leave millions of people at greater risk of an income shortfall when they reach retirement.”
“There is widespread agreement that the current minimum levels of auto-enrolment contributions are insufficient to deliver good outcomes in later life for most people, yet we still don’t even have a firm timetable for introducing the relatively modest reforms proposed in 2017 – namely applying minimum contributions to the first pound of earnings and reducing the qualifying age from 22 to 18.”
“Furthermore, millions of self-employed workers are not included in auto-enrolment, leaving them at severe risk of having little or nothing saved for their later years.”
Selby added that savers face “perpetual uncertainty over the way pensions are taxed”.
“If plans to address adequacy are being kicked into the long grass, providing a bit of certainty about pensions taxation feels like the bare minimum the government should do to reassure people.
Labour now needs to come clean on exactly how it plans to tackle pensions adequacy, which remains one of the most pressing issues facing society and is a potential ticking time bomb if left unaddressed.
Last week, the Institute for Fiscal Studies claimed that up to 40 per cent of savers in defined contribution schemes will have to retire with incomes below the minimum living standard set out by the Pensions and Lifetime Savings Association trade body.
Hugely detrimental to people’s financial future
Catherine Foot, director of Phoenix Insights, said: “Hitting pause on the retirement adequacy review could be hugely detrimental to people’s financial future.”
In the next five years, the majority of defined contribution pension savers will enter retirement with less income than they expect or need, and this will worsen to a peak in the early 2040s“, according to research from the group published in October.
“There are clearly some valid concerns around what increases to auto-enrolment contributions might mean for businesses, but that shouldn’t stop analysis and consensus-building on how and when we address the retirement crisis unfolding before our eyes.”
Increasing minimum auto-enrolment contributions is one of the biggest levers to tackle undersaving and we cannot afford to delay setting out a plan to incrementally raise contributions.”
She added that “the adequacy review is a golden opportunity to look at the retirement landscape as a whole and prevent serious problems for individuals and the state in years to come. With the impending retirement crisis about to unfold, the review should not be kicked into the long grass.”
Phoenix analysis in April of this year, before the election when Labour said they would implement a review, also claimed that for a typical 18-year-old, increasing minimum auto-enrolment contributions from eight per cent to 12 per cent could lead to almost £96,000 extra in their pension pot at state pension age, equivalent to £64/week.
However, delaying this increase by five years reduces the total additional savings potential by nearly £10,000, while a 10-year delay reduces the additional savings potential by around £22,000 and a 15-year delay by £35,000.
Heidi Karjalainen, a senior research economist at the Institute for Fiscal Studies said: “A comprehensive review of the UK pension system is long overdue, and indeed this is why we at the IFS are currently working on our own Pensions Review.”
“The Labour manifesto was absolutely right to commit to initiating a review of the UK pension system, and we strongly hope this process begins in 2025. We also hope that the review will be thorough and not rushed, this way changes affecting employers can also be gradually phased in over time.”