Creating a pension system that is at once adequate, fair and sustainable will require “political courage and a willingness to confront difficult tradeoffs”, the Pensions Commission has said as it calls for a renewed national settlement on pensions in its interim report, published on Tuesday.

The commission was set up because future retirees cannot hope to live as well as current ones. Its interim report, ‘Pensions 2050: Evidence and future priorities’, summarises the scale of the challenge. The report contains stark facts that have been known for years, but which have not prompted any political action since the new state pension and auto-enrolment were legislated for.

Low and middle earners are most at risk of pensions poverty as around half save only at minimum auto-enrolment levels with little else to fall back on, and 45% of working-age adults, about 18m, are not saving into a pension at all, despite nearly half being in work. Women, disabled people and some ethnic minorities are most at risk. Of the roughly 4m self-employed people, just 4% save for retirement. 

Baroness Jeannie Drake, one of the pensions commissioners alongside Professor Nick Pearce and Sir Ian Cheshire, called for “a renewed national settlement on pensions” to address these challenges. 

She said: “Achieving this will require clarity of purpose, but it also offers a moment of opportunity; to renew a social contract that commands confidence across the country. The recommendations we present in our final report will address the need to secure adequate income in later life and a pension system that is fit for decades to come.”

These recommendations as part of the final report are due next year. The commission has launched a call for views from all interested parties today. 

The interim report offers some hints at where the focus for the next stage will lie. It concludes that while the state pension is delivering what the Turner Commission recommended, private pensions are not, saying that “private pensions need to do more”.

For lower and middle earners, auto-enrolment eligibility, earnings thresholds and minimum contribution rates must be sufficient to support adequate incomes, it adds, and an adequate savings system “must include a solution” for the self-employed.

The UK has got back into the pension saving habit, but “the job is only half done with tomorrow’s pensioners still on track to be poorer than today’s”, said pensions minister Torsten Bell, adding: “The Commission warns that without action millions more people could be at risk of becoming reliant on state support in retirement.”

However, there is unlikely to be a revolution in pension saving, as any recommendations are expected to be implemented gradually, something the government is likely to be keen to ensure given both the economic and political backdrop. 

The current government has ruled out increasing auto-enrolment contributions in this parliament and has seemingly made no progress towards implementing the recommendations of the 2017 Auto-Enrolment Review, which were promised for the mid-2020s. Similarly, no discernible work has been done to improve outcomes for the self-employed to date.

In contrast, ministers have been willing to support current pensioners generously, promising to maintain the ‘triple lock’ uprating of the state pension. This was introduced to address pensioner poverty and has succeeded in its aim, with pensioners currently the least likely age group to be poor. Strikingly, the commission’s report states that “the income gap between the median pensioner and non-pensioner has been eliminated”. 

The Pensions Commission’s interim report is “a wake‑up call”, said Helen Forrest Hall, chief strategy officer at the Pensions Management Institute. 

“The Pension Schemes Act is a strong start, but the industry needs bold and innovative solutions on the scale of automatic enrolment to deliver adequate retirement incomes. We call on the Pensions Commission to be brave in its recommendations and build cross-party consensus for an enduring reform roadmap,” she said.

Some called for greater urgency as well as boldness. The commission’s final recommendations in 2027 “cannot pull any punches”, said head of DC at Barnett Waddingham, Mark Futcher. “We can’t keep staring at the same problems year after year – it’s time for decisions that genuinely move the dial on retirement outcomes.” 

The chief executive of the People’s Pension, Patrick Heath-Lay, said the next step will be for the commission to bring together business, trade unions, the pensions industry and the public to develop a consensus view on further reform.  

“That needs to start from an idea of what the pensions system is here to do and what levels of income the state pension and legal minimum pension contributions should target,” he said.

The progress on pension reform over the past 20 years shows the value of a consensus that survives multiple governments, he said but pointed out that “the economics of reforming the system are more difficult now than in the early 2000s” as forecasts for household income growth are “challenging”. Demographic changes is adding further strain.

“Despite this, we’re optimistic that the right combination of leadership, collaboration and understanding will deliver a positive roadmap for the UK pensions system,” he added.

Productivity and wage growth have been weak since the first Pensions Commission, the report acknowledges. However, some believe employers are not all negative. 

“Despite tough economic conditions, we’ve found that employers want to support greater pension saving,” said Catherine Foot, director of the Standard Life Centre for the Future of Retirement. 

Employers are “crying out for clarity on what these changes might look like and need greater certainty about timing, pace and budgeting for any changes”, she said. 

Trade unions are clear they want to see higher employer contributions. Unusually for a European country, at 3% the UK pension system requires lower employer contributions than the 5% that workers are obliged to pay in, which some believe reduces the incentive to save.

“Although millions more people are now building up workplace pensions, far too many on low and middle incomes are not heading for a decent retirement – with women, Black and minority ethnic and disabled workers, and those in the gig economy at highest risk. The Commission must now develop a bold plan to fix this, which will need to include higher employer contributions and a fair deal for those currently missing out,” said TUC general secretary Paul Nowak.  

Employers stressed that much depends on how the economy fares. Louise Hellem, chief economist at the Confederation of British Industry, said any reforms must be made in the context of growth. 

“Strong economic growth underpins sustainable pension outcomes by supporting employment and higher sustainable wage growth, enabling individuals to save, and driving stronger investment returns over time. It is only growth that can sufficiently reduce difficult trade-offs and maintain political, public and business support for change,” she argued. 

A research report for the Department for Work and Pensions was published yesterday which is informing the commission’s work. Among others, the report concluded that auto-enrolment falls short when it comes to closing the gender pensions gap. The DWP previously found that for people aged 55-59, the gender pensions gap in 2020 to 2022 was 48%, with women having median pension wealth of £81,000, compared to £156,000 for men.  

The Commissioners said efforts must now turn to the private pension savings gap that women face relative to men, noting that the UK has the second highest gender pensions gap in the OECD, despite above‑average basic pension entitlements. 

However, it concluded that the gender pensions gap "cannot necessarily be resolved through the pensions system”; instead, “wider public policy” should consider how to address it. This is despite pensions solutions like family pensions having been recommended by industry, and the Local Government Pension Scheme just having made unpaid parental leave pensionable.

Since the flat-rate state pension and carer credits were introduced, politicians have shown little to no appetite to address the gap with immediate steps, recommended by industry and public institutions. Pension sharing on divorce is still voluntary, despite the Law Commission suggesting this should be addressed.

Instances where the state has failed women have contributed to the issue. An ombudsman recommendation to pay some compensation to older women for the late communication of state pension age changes has been rejected by the work and pensions secretary. Separately, the DWP had also underpaid about 230,000 women their state pension in a further administrative failure. Thousands of them died before receiving their proper entitlement.