In-depth research just completed by the independent Pensions Policy Institute (PPI) warns that three-quarters of today's workers will end up on means-tested benefits because of the pensions crisis.
The PPI’s report - The Pensions Landscape – reveals that although today’s pensions landscape looks better than yesterday’s, a serious crisis is looming. If the UK is to avoid tomorrow’s pensioners being worse off than today’s, reform of state pensions is the priority.
The PFI said the government's recent pensions Green Paper failed to address the problem of state pensions that shrink in real terms as the years go by. While means-tested benefits for the poorest pensioners go up every year in line with earnings, the state pension is linked to prices.
As a result, the state pension will be worth so little by the time today's workers retire, most will have to claim means-tested benefits to make ends meet.
The report highlights unclear responsibilities for pensions that are storing up problems for the future. Government policy assumes individuals will do more to save towards their income in retirement. But in reality, many people are unable – or unsure of how - to act.
Saving into private pensions has "stalled", the report says, with people starting later and saving more irregularly.
But economic uncertainty, a volatile stock market and pensions misselling scandals are hardly going to encourage savers to trust their money to private pension schemes.
Alison O’Connell, Director of the PPI and joint author of the report said, “Clearly there is no shortage of pension headlines at the moment. But behind the obvious short-term challenges lies a potential crisis of lower incomes that will be apparent only in the long-term.
At the heart of the issue are problems in the structure of state pensions. The Green Paper identified useful initiatives to do with private saving and working patterns. But our analysis shows that we also need debate - now - on what we want from state pensions in the future.”
The Pensions Landscape shows that the average pensioner income has risen since 1997. The wealthiest fifth of pensioners are three times better off than the poorest fifth; the difference being made by private pension income. A quarter of pensioners remain in relative poverty.
The research could not identify any signs that future pensioners will be any better off than today’s. Both the state and employers are reducing their long-term pensions commitment - 75 per cent of company final salary schemes will close within five years according to recent figures - and there is no evidence that people are making up for this through their own pension or other savings.
“To build on government initiatives in other areas, we suggest an open review of future ambitions for state pension policy.” Alison O’Connell continued, “This would help to resolve the problems of means-testing, ensure the state pension is robust in this era of increasing life expectancies, clarify the long-term cost to the state of pension provision and give private pensions the right role.”