Weekend Essay: The UK pension system is ripe for reform

Pensions have always been a battleground for the two main political parties, and often it’s the arena where elections are lost and won.

During the most recent campaign, Labour promised far-reaching reforms of the pension sector if it came into power.

After winning the election with a big majority, it has wasted no time in implementing that pledge.

This week, new chancellor Rachel Reeves announced a landmark review of the pension system.

She said: “Despite a very challenging inheritance, this new government is getting on with the job of delivering our mandate to get the economy growing so we can make every part of our country better off.

“The review is the latest in a big bang of reforms to unlock growth, boost investment and deliver savings for pensioners. There is no time to waste.”

Reeves has the unenviable task of fixing a broken pension system. It’s apparent that she is not being fazed by the challenges ahead.

Hours after launching her landmark pension review, she held a roundtable with power brokers in the pensions sector to outline her plans.

She suggested that they would unfold in two stages, targeting both immediate and long-term improvements in pension management.

The first stage will focus on promoting productive investments through scheme consolidation and the encouragement of broader investment strategies to ensure funds are allocated to areas that yield higher returns.

The second stage will concentrate on improving pension outcomes and fostering increased investment in UK markets. This is scheduled for later this year.

Pensions minister Emma Reynolds has been drafted in to oversee the reform implementation.

The Labour government is quite hopeful about its pension reforms programme.

It said the new Pensions Bill, confirmed in King’s Speech last week, could boost pension pots by over £11,000.

It added that further consolidation and broader investment strategies will potentially deliver higher returns for pensions.

It also said an investment shift in defined contribution schemes could deliver £8bn of new productive investment into the UK economy.

However, sceptics are likely to question the suggestion that the average pension saver could benefit by £11,000.

One of them pointed out that the extra £11,000 being proposed by the chancellor will come from increased auto-enrolment (AE) contributions. “People get increased pensions from the Labour Party by forcing them to invest more,” they claimed.

Whatever your position on this issue, that’s debate for another day. We are in the honeymoon period and there is no room for killjoys.

Meanwhile, the reaction from the pension sector has been positive. They applauded the Labour government for bringing forward its pensions review so quickly.

Hannah Gurga, director general of the Association of British Insurers said: “We welcome the holistic approach with the interests of savers going hand in hand with further boosting investment in the UK.

“Good outcomes for savers and providing stability must ultimately be at the heart of the reforms and we look forward to working with the government to achieve this.”

Gurga’s point about stability is the most important for many in the pension sector.  Over the past two decades, successive governments have embarked on major reforms without addressing the core issues facing many pension savers.

“We’re constantly seeing toing and froing on pension policy. But we need stability because pension is a key part of long-term financial planning for most people. People need stability to invest in confidence,” Alastair Black, head of savings policy at Abrdn, recently told me.

Savers need to invest more in order to stand any chance of having a decent retirement pot to live on. Currently, there is a shortfall of pensions contributions across all age groups due to several factors including the cost of living crisis.

Research after research has shown that more people will have to either delay their retirement, return to work or never retire at all.

Pension analysts have described the current UK pension system as a “ticking time bomb” for many future retirees.

Scottish Widows latest Retirement Report painted a gloomy picture for pensioners. It showed a rise in the number of people that would not meet the Pensions and Lifetime Savings Association’s minimum Retirement Living Standard.

The report also showed that millions of UK workers are likely to delay retirement due to the worrying gap between their desired retirement age and the adequacy of pension savings.

It goes without saying that fixing the ‘broken’ pension system is a matter of urgency. The Labour government should be commended for making it a priority.

Let’s hope this latest pension reform will fix the ‘mess’ and bring good outcomes for savers.