1) The UK pension system faces many challenges including low levels of private pension saving, increasing numbers living in expensive private rentals in retirement, and difficulties posed by higher state pension ages. 2) Public finances will also come under significant pressure in coming decades as spending on state pensions and benefits for pensioners is projected to rise substantially due to demographic changes. 3) The review will examine these challenges and propose policy recommendations to help ensure adequate and appropriate retirement saving and support over the coming decades.

1. Challenges for the
UK Pension System:
The Case for a
Pensions Review
Carl Emmerson
▪ Pension Playpen
coffee morning
▪ 21 May 2023
@TheIFS
@finan_fairness

2. Macroeconomic
instability caused by
the Great Recession
and a pandemic
Falls in long-run
risk-free interest
rates and other
asset returns
Growth in self-
employment (not
covered by AE)
Declining home
ownership, growth
of private rented
sector
Stalling life
expectancy in 2010s
Further falls in
prevalence of
defined benefit
schemes
Attempts to facilitate
collective defined
contribution
arrangements
“Pension Freedoms”
Working age
benefits less
generous
Changing balance
of ISA / pension
annual allowance
New triple-locked
flat rate state
pension
Acceleration of the
increase in state
pension age
Huge changes since 2005

3. © Institute for Fiscal Studies
Rates of return have fallen
Projected annual real rates of returns
Source: Adapted from Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 6.
2.0
2.7
6.0
-0.5
0.3
4.0
-1
0
1
2
3
4
5
6
7
Government bonds Corporate bonds Equity markets
%
Pensions Commission assumptions
FCA latest assumptions for prescribed projections (2017)

4. 1. Many people are only saving very little for retirement
2. Increasing numbers approaching retirement live in the more
expensive, insecure private rented sector
3. Higher state pension ages pose difficulties for many
4. More state support would help, but demographic and other
pressures on the public finances are already considerable
5. Difficulty and risk in managing finances through retirement
Cross cutting challenge: increased risk borne by individuals
© Institute for Fiscal Studies
Key challenges facing future
pensioners

5. 1) Many people are only
saving very little for
retirement

6. © Institute for Fiscal Studies
AE had a huge impact on pension
participation – driven by DC schemes
Proportion of private sector employees participating in DB and DC
schemes
Source: Adapted from Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 5.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Defined Contribution
Defined Benefit
Any pension

7. © Institute for Fiscal Studies
Amounts saved into pensions are
on average low
Proportion of private sector employees in the middle earnings quintile
(saving in a pension), with given total contribution rates of pre-tax earnings
Source: Adapted from Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 4. Data from 2019.
10%
61%
87%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Less than 5% of earnings Less than 8% of earnings Less than 15% of earnings
Over half of those in public sector DB
schemes get an employer
contribution of at least 20% of salary

8. © Institute for Fiscal Studies
Many, especially self-employed, are
not saving in a private pension
0
1
2
3
4
5
6
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Millions
Source: Adapted from Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 7.
Number of self-employed people participating, and not participating
in a private pension scheme, 1998-2020
Self-employed workers

9. © Institute for Fiscal Studies
Many, especially self-employed, are
not saving in a private pension
0
1
2
3
4
5
6
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Millions
Saving in a private pension
Not saving in a private pension
Source: Adapted from Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 7.
Number of self-employed people participating, and not participating
in a private pension scheme, 1998-2020

10. 2) Increasing numbers
living in private rented
accommodation

11. © Institute for Fiscal Studies
Younger generations much more
likely to be private renters
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
25
30
35
40
45
50
55
60
65
70
74
Source: Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 8.
Proportion of people living in private rented accommodation, by
age and decade of birth
1960s
1970s
1980s
1950s
1940s 1930s

12. 3) Higher state pension
ages pose difficulties for
many

13. ▪ A coherent response to the public finance challenge from increased
longevity
▪ Increase in SPA from 65 to 66 led to an additional 8 out of 100 65-
year-olds being in paid work
▪ Increasing SPA will cause financial risks for people who find it
difficult to delay retirement in response to increased SPA
▪ Those in poor health: over 40% of those aged 65-69 with low
education qualifications report a disability
▪ Those with caring responsibilities
▪ Those involuntarily unemployed
© Institute for Fiscal Studies
Increase in the state pension age

14. 4) Significant pressure on
public finances in coming
decades

15. © Institute for Fiscal Studies
First large rise in % of adult
population over SPA coming in 2030s
0%
5%
10%
15%
20%
25%
30%
35%
40%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
%
of
the
adult
population
(aged
20+)
Source: Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 13.
Percentage of the adult population aged 65 or over, or above state
pension age, 1971 to 2020 (out-turn) and to 2070 (projected)
% of population 65+
% of population
above SPA

16. © Institute for Fiscal Studies
Forecasts show spending on
pensions will increase dramatically
Source: Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 12.
OBR projections for public spending, 2021 to 2071
4.8% 4.9% 5.5% 6.2% 7.3% 8.1%
0.7% 0.8%
1.0%
1.2%
1.4% 1.5%
10.3% 10.2%
11.9%
13.7%
15.6%
17.5%
0%
5%
10%
15%
20%
25%
30%
2021 2031 2041 2051 2061 2071
Per
cent
of
national
income
Health and adult social care
Pensioner benefits
State pensions

17. 5) Difficulty and risk in
managing finances through
retirement

18. © Institute for Fiscal Studies
Annuity purchases fallen, exposing
people to more longevity risk
Source: Cribb, Emmerson, Johnson, Karjalainen and O’Brien, 2023. Figure 15.
Data from the Association of British Insurers (ABI), copyright of ABI.
Number of annuity and drawdown purchases, 2007 to 2022
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Number
of
purchases
Annuity purchases
Drawdown purchases
Pension Freedoms
announced
Quarter of 66 year old men die by age
79, one quarter live beyond age 91

19. The Pensions Review

20. ▪ Multi-year IFS-led review of pensions in the UK and the future of
financial security in retirement
▪ In partnership with abrdn Financial Fairness Trust
▪ Focus on the challenges ahead for future generations of pensioners
and propose concrete policy recommendations
▪ We will be synthesising existing and emerging evidence,
producing new empirical analysis and undertaking detailed
modelling work
▪ We are going to be publishing a series of reports from autumn 2023
to early 2025
▪ Launch final recommendations and policy options for reform in early
summer 2025
© Institute for Fiscal Studies
The Pensions Review

21. 1. Are people saving appropriately for retirement, both in terms of
the amount and the form of saving, and if not, how can
government policies help?
2. Does the state appropriately support people from late working life
and through retirement?
3. Do people require more assistance to use their wealth
appropriately through retirement, and if so how should that
assistance be provided?
© Institute for Fiscal Studies
Three key strands of work

22. The Institute for Fiscal Studies
7 Ridgmount Street
London
WC1E 7AE
www.ifs.org.uk