Why the government’s Pensions Review needs to aim big

The government’s promised Pensions Review is beginning to take shape, but is in danger of being rushed.

It should aim to lay the groundwork for more ambitious reforms to truly fix our broken occupational pensions system.

Labour’s manifesto promised a “review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets”. The party has lost no time in pushing this agenda forward in government.

First came the announcement of a Pension Schemes Bill, largely focussed on embedding existing reform processes, followed by plans for the broader review.

Though the terms of reference for the first phase of this review are very brief, two things stand out.

First, the timeframe is extremely tight, which is rarely good news in an industry that needs wide consensus for major reform.

Second, the level of ambition is unclear. The aims sound bold – delivering significant changes to investment and better outcomes for pension-savers – but seem to be undermined by the proposed timings.

The first phase of the review is due to be completed this year, and includes reforming the “structure of the pensions ecosystem” and boosting UK investment. The hope must be that they are not intending to ‘solve’ these issues by Christmas, but are laying the foundations for phase two to deliver truly ambitious reforms.

The need for change

Big change is certainly needed. Our research has shown the current system excludes millions, individualises risks, and creates the prospect of insecure retirements for the majority, while at the same time failing to invest enough in the UK, especially in supporting a green transition.

The review needs to deal with the fact that the move from defined benefit (DB) to defined contribution (DC) schemes has shifted risks to individuals. Reinvigorating DB schemes and expanding collective DC schemes should be central to the systemic reform agenda.

Consolidation into bigger Canadian-style mega-funds is not a solution on its own, and much more thinking needs to go into the long-term investment agenda.

Rather than rushing the process, the government should establish a permanent, independent Pensions Commission with representation from a wide variety of stakeholders to develop ambitious proposals which can secure broad support. 

Central to these proposals should be a focus on ensuring that increased investment in the UK directly supports the transition to a low-carbon economy.

After all, the climate and nature crises will have perhaps the biggest impact on the quality of our lives in retirement.

The good news is that there are already win-win proposals on the table, including in a paper published earlier this year, for how the government can boost investment, support a just transition and achieve better outcomes for savers and pensioners.

A progressive system

Stage two of the review offers opportunities for boosting green investment by increasing overall savings.

For example, there is broad agreement from the pensions industry, trade unions and policy experts that we all need to save more, up from 8% to 12% or even 15% of earnings.

At the same time, we need to make the system more progressive, to support everyone to save for a decent level of retirement income, including the self-employed and those with gaps in their work histories.

The government is right to prioritise pensions reform and has put many of the key issues on the table. There are big prizes to be won here, for savers and pensioners, for the economy and for the planet – but achieving those will require a rigorous and inclusive process, with a high level of ambition.

These are changes which could make a difference for decades, and it makes no sense to rush the process now.

Jesse Griffiths is chief executive officer at the Finance Innovation Lab.