Industry association Pensions UK has published a new report warning that the cost of delaying improvements in pensions adequacy will be higher than those incurred by reforming the system.  

The paper, 'The better pensions dividend' brings together Pensions UK's proposals for changing the pensions system in one place and quantifies the benefits of acting now, as well as the cost of inaction.

“Pension reforms are not only necessary; they are urgent. Better pensions can deliver a wider dividend – stronger household resilience, improved retirement incomes, larger pools of investment capital, stronger growth and reduced long-term pressure on the public finances. The choices ahead will not be easy, but the cost of inaction would be greater: lower retirement incomes, wider inequalities, weaker confidence in pension saving and growing pressure on future governments to fill the gap," said Zoe Alexander, chief policy officer at Pensions UK. 

“Through the work of the second Pensions Commission, the UK has a critical opportunity to build a more sustainable and durable pensions settlement. Well-designed, phased reforms can deliver lasting gains for individuals, the economy and the public finances, even where the short-term context is challenging," she added. 

The Pensions Commission is expected to produce a final report and recommendations in spring next year. Its interim report suggested large-scale undersaving, with the commissioners saying that political courage and a willingness to confront difficult tradeoffs would be needed. 

The association has long called for increasing auto-enrolment minimum contributions to 12%, split equally between employer and employee, by 2035 at the latest. In July, it called for a definition of pensions adequacy that combines a minimum threshold with target replacement rates, along with the creation of a National Council for Retirement Adequacy to regularly review the pensions system.

The UK finished a six-year roll-out of automatic enrolment in early 2018, with contribution levels unchanged in the eight years since then at 3% for employers and 5% for employees. In comparison, Australia put up contributions, mandatory for employers, from 3% in 1992 to 9% within 10 years. Since then, they have been put up to 12% and are applied without an earnings trigger; the UK requires people to earn at least £10,000 from a single job to be eligible.

Pensions UK's report predicts that increasing auto-enrolment contributions to 12% could provide a typical 18-year-old with an extra £96,000 in their pot by the time they retire, while broader coverage would improve outcomes for low and middle earners, women, part-time workers, multiple job holders and the self-employed.

With employers expected to put up resistance, the organisation said auto-enrolment reforms should be phased in, "to recognise cost pressures on employers and savers while improving long-term retirement outcomes". It also reiterated a long-standing industry proposal that HM Revenue and Custom should devise a form of automatic enrolment for the self-employed through the tax system, alongside trials of digital tools and platforms. Such trials have been conducted by Nest among others, following a recommendation in the Automatic Enrolment Review in 2017.

It has now added a proposal to set a goal for the level of the state pension and introduce a ‘Living Standards Safeguard’ to maintain it once it has been reached. Pensions UK said replacing the triple lock with a Living Standards Safeguard could save around £11bn a year by 2050 compared with maintaining the current triple lock policy.

Prime Minister Andy Burnham recently announced a change to the triple lock whereby the pension uprating in line with earnings increases is no longer automatic. Instead, the earnings link will in future only kick in if the state pension falls below the proportion of earnings it will have reached when the new policy starts in 2030. This implies that proportion, around 30%, will effectively act as a target. The inflation link and 2.5% if inflation is below that continue as before. Labour has put the savings at £15bn a year by the end of the 2030s, rising to £50bn a year by 2050.

While the Pensions Commission warned of tradeoffs from reforming auto-enrolment, such as people consuming less due to lower take-home pay, Pensions UK put the emphasis on the opportunity cost from delaying reform. It cites modelling by Oxford Economics for Royal London suggests higher pension saving, potentially £17bn a year, can support stronger medium to long-term growth by increasing the supply of patient capital available for investment. Separate modelling projects that increasing contributions would add £5bn to UK investment over 10 years.

In a separate report published today, IFM Investors, Nest and Border to Coast Pensions Partnership have said that 77% of the public is in favour of pension funds investing in UK housing, healthcare and life sciences, renewable energy, transport, utilities and digital infrastructure.

Pensions UK stressed further modelling by Oxford Economics which predicts that pressure on disposable incomes and employment costs from higher pension contributions would be temporary. The thinktank projects that the negative GDP trend would begin to recover within three to four years and recover fully within about nine years.