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Second Pensions Commission – Intergenerational Foundation Response

The first Pensions Commission recognised that an ageing population would involve difficult trade-offs. Longer retirements could only be funded through some combination of higher taxes, higher private saving, later retirement or lower relative pensioner incomes.

That basic arithmetic has not changed, but the pressures are now more immediate. The large baby-boomer cohort is already at or near retirement age. Home ownership among younger and middle-aged cohorts has fallen. Private pension saving remains inadequate for many workers. Meanwhile, the State Pension has become more expensive as a result of demographic change and the triple lock.

The Commission is right to place adequacy, fairness and sustainability at the centre of its work. Its interim report also makes clear that the State Pension remains indispensable for many retirees and that pensioner poverty remains a real concern. However, adequacy cannot mean protecting retirement incomes regardless of the cost to taxpayers. Sustainability cannot mean cutting support from those who genuinely need it. Fairness must include fairness within generations as well as fairness between generations.

From an intergenerational perspective, the central problem is that the current system places too much of a burden on working-age taxpayers. Given the State Pension operates on a pay-as-you-go basis, the pensions paid to today’s retirees are funded by today’s workers. As the number of pensioners rises relative to the number of workers, this model becomes even more burdensome unless policy changes.

A fair settlement must therefore rebalance responsibility between the state, employers and individuals. The state should provide a secure foundation and protect pensioners from poverty. Employers should be expected to contribute more towards workers’ future retirement incomes. Individuals who can afford to save more should be supported to do so. Wealthier retirees should not be insulated from reform simply because many pensioner benefits have historically been universal.

The goal should be to create a system that protects poorer pensioners, supports adequate retirement incomes, and prevents the costs of population ageing from falling disproportionately on younger and future generations.

Recommendations

IF recommends that the Government should:

1. Replace the triple lock with a more stable and sustainable uprating mechanism. IF’s preferred reform is to cap State Pension increases at CPI inflation until 2030-31, and then uprate the State Pension by the average of inflation and earnings thereafter.
2. Redirect some of the savings from triple lock reform towards poorer pensioners. One option would be to introduce a new Low-Income Pension Supplement for households receiving Pension Credit.
3. Begin a gradual transition towards a more targeted and means-tested State Pension. In the longer term, the Government should examine options for reducing or removing State Pension entitlements for the wealthiest retirees, including income and asset testing.
4. Raise the State Pension age and introduce a clear automatic adjustment mechanism linked to life expectancy. IF has previously argued that the Government should consider increasing the State Pension age to 70 by 2035, before moving to a two-thirds longevity link thereafter.
5. Strengthen support for those unable to work up to a higher State Pension age. This includes disabled people, carers, people in poor health and those in physically demanding occupations.
6. Move towards a stronger mandatory private pension system. This should include higher minimum contribution rates, higher employer contributions, broader coverage, and better provision for the self-employed.
7. Remove the National Insurance exemption for people working above State Pension age. This will ensure that older workers continue to contribute fairly.