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Ten years ago, the Pensions Commission concluded that the ageing population left society and individuals with four options: pensioners could become relatively poorer; public spending on pensions could rise; people would need to save more; or people would need to work longer. As the first option (poorer pensioners) appeared unattractive, some mix of increased higher taxes/NI contributions, higher savings and later average retirement was likely to be needed. The 2015 Parliament will see the implementation of significant reforms to address these conclusions. Monitoring their implementation and deciding whether more is needed will be an issue for the current Parliament.

Requirements on employers to automatically enrol workers into a workplace pension and make minimum contributions started to be introduced in October 2012 and will be fully phased-in from October 2018. The policy was legislated for by the Labour Government. The Conservative Liberal Democrat Coalition Government decided to continue with it following a review, but thought further reforms were needed for it to succeeed.

In particular, it believed the complexity of the state pension made it difficult for people to plan for retirement. It legislated to combine the existing two tiers of the state pension into a single tier for future pensioners from 6 April 2016. The new state pension may encourage individuals to save for retirement. This is because, although communicating its effects will be a challenge in the transition, in the longer term it should be clearer to individuals how much they can expect, which should simplify decisions about saving. 

However, the reform will also increase the necessity for younger individuals to save privately if they are to achieve an adequate income in retirement because, according to the Institute for Fiscal Studies, in the longer term the new state pension will be less generous than the current system for most people. Although auto-enrolment has started to increase the number of pension savers, a potential downside of the policy is that people assume that contributing at the minimum rate is enough, only for some to find out too late that their savings are inadequate. Some commentators have therefore suggested a policy of ‘auto-escalation’, where contribution rates increase in line with earnings increases. However, it will be important to get the balance right, so that those who would benefit from saving are not prompted to opt out.

The vast majority of those auto-enrolled will be saving in defined contribution (DC) schemes which they have not chosen for themselves. This has focused attention on measures to improve the outcomes and value for money afforded by DC pensions, such as a cap on charges and stronger governance arrangements.

The 2015 Parliament will also see increases in the State Pension age (SPA) – to 65 for women by November 2018, from which point the SPA for men and women will start to rise to 66, which it will reach in October 2020. It will then rise to 67 between 2026 and 2028. A review in 2017 is to consider the SPA in the light of life expectancy and other factors.

A further issue will be how individuals and providers respond to the new choices about when and how people aged 55 and over draw their defined contribution pension savings from April 2015.

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