For many who are retired or approaching it, the path has been relatively clear: you typically paid into the state pension and often a company pension for your working life, and in return, you could expect a certain level of security.
But the landscape has shifted. Stark new warnings show that today’s workers, including your children and grandchildren, are on course for a poorer retirement than you.
Women will be particularly badly hit. Without urgent action, someone retiring in 2050 is projected to receive £800 less each year from their private pension than someone retiring today.
Now the government has announced it will revive the Pension Commission, to try to find solutions.
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The first Pension Commission was set up in 2002 by the Blair government and ran until 2006. This led to the introduction of automatic enrolment into workplace pensions back in 2012.
That successfully brought millions of new savers into the system, with the number of eligible employees saving soaring from 55% in 2012 to 88% today.
But while more people are technically saving for their retirement, they aren’t saving enough. While public sector workers are often still on defined benefit (like career average or final salary) pension schemes, most private sector workers are on defined contribution schemes.
Government analysis reveals that half of all private sector workers are only saving at around the minimum level of 8% of their earnings. This includes employer contributions – the average is 4% from employer contributions and 4% (including tax relief) from employee contributions.
As Rachel Vahey, head of public policy at AJ Bell, explains: “While automatic enrolment has created 11 million new pension savers, many are saving the bare minimum.”
These small percentage contributions are simply not building up a large enough pot to guarantee a comfortable retirement.
Chira Barua, chief executive of Scottish Widows, says: “While automatic enrolment has been a gamechanger in kickstarting pensions saving for millions of workers, 39% (around 15 million) still risk facing poverty in retirement and action needs to be taken while there’s still time.”
Meanwhile more than three million self-employed people are not saving into a pension at all – in part because the auto-enrolment framework does not cover them.
A 48% gap exists in private pension wealth between men and women. A typical woman approaching retirement today can expect a private pension income of over £5,000 a year less than a typical man.
Rachel Vahey, head of public policy at AJ Bell, describes the gap as ‘truly appalling’. She adds: “The government’s latest research paints a bleak picture for women approaching retirement. For too long government has acknowledged this gap but failed to tackle it head on... A 48% gender pensions gap is quite frankly unacceptable.”
The problem isn’t that women save less diligently. In fact, contribution rates as a percentage of salary are roughly the same for both men and women. Women are more likely to work part-time, have career breaks for childcare, and on average, earn less than men.
As a result, even if they save the same percentage, the actual cash amount going into their pension is significantly smaller over a lifetime. The data shows how this gap widens over time. For women aged 25-29, the pension gap is 22%. By the time they reach 45-49, it is 52%.
As Vahey notes: “The analysis clearly shows that the wheels come off women’s retirement saving when they start a family.”
The type of pension scheme also plays a role. The gap is significantly smaller for those with defined benefit pensions, which are now mostly found in the public sector. For those relying on defined contribution pensions, the gap widens to 75%.
Experts suggest potential solutions could include lowering the £10,000 earnings threshold for automatic enrolment, which currently freezes out many women who hold several lower-paid, part-time jobs.
This would also benefit lower-paid workers in general. Only one in four low-paid workers in the private sector is currently saving into a pension.
Jon Richards, general secretary of the trade union Unison, says: “Any initiative that enhances current provision would be a good thing, especially moves to improve equality between men and women.
“With more pensioners falling into poverty as time goes by, it’s vital the commission works quickly.”
The revived Pension Commission will be steered by a panel of experts: Baroness Jeannie Drake, who served on the original commission; business leader Sir Ian Cheshire; and public policy expert Professor Nick Pearce.
Their task is to conduct a root-and-branch review of the entire UK pension system and deliver a final report with recommendations by 2027.
Their goal is to build a consensus for a system that is “strong, fair and sustainable” for the long term.
Announcing the commission, Liz Kendall, the work and pensions secretary, said: “People deserve to know that they will have a decent income in retirement – with all the security, dignity and freedom that brings. But the truth is, that is not the reality facing many people, especially if you’re low paid, or self-employed.”
Alongside the new commission, a separate review of the state pension age has been announced. Dr Suzy Morrissey, deputy director of the Pensions Policy Institute and former advisor for the New Zealand Retirement Commission, has been asked to prepare an independent report.
The report will look at the merits of linking state pension age to life expectancy, including the effects on “fairness between generations”. It will also look at the role of state pension age in “managing the long-term sustainability of the state pension.”
The state pension age is rising to 67 between 2026 and 2028, and then to 68 between 2044 and 2046. But the rise to 68 could be brought forward, and there could be further rises beyond that.
The previous government proposed bringing forward the rise to 68, but then held back because average life expectancy was stalling.
Caroline Abrahams, charity director of Age UK, says: “There’s no getting away from the fact that the state pension provides the bulk of retirement income for most pensioners... It’s therefore hugely important to consider the future of the state pension alongside the role of private savings.”
The government has said that these reviews will not touch the state pension triple lock, which is the guarantee that means the state pension increases every year in line with either inflation, wage increases or 2.5% – whichever is highest.
And the government has also said it is committed to leaving the triple lock in place for the rest of this parliament.
Simply forcing everyone to pay more into their pension may not be the answer, especially when inflation has already squeezed household budgets.
The commission will need to think more creatively. One possible measure could be higher contribution rates depending on earnings, rather than the blanket minimum that currently applies to eligible employees.
The government has ruled out any increases to the rate of employer contributions during this parliament, which runs until 2029. And following this year's rise in employer national insurance contributions, there is pressure to avoid adding further costs on businesses.
Rocio Concha, director of policy and advocacy at Which?, says: “For some consumers, the idea of contributing more money into their pension pot is both daunting and unmanageable, so it is crucial that this review looks in depth at the challenges savers face.”
Miles Celic, chief executive of industry body The CityUK, says: “Total contributions will have to rise if we are to emulate the successes of, for example, Australia and Canada.
“This will involve difficult political choices alongside technical changes to policy and regulation, so it is right the appointees to the Commission consider the options thoroughly and, crucially, that they also draw on the industry’s significant expertise.”
Finding a workable solution for the millions of self-employed workers currently outside the system will also be a top priority.
Sophia Singleton, president of The Society of Pension Professionals, praises the government for “considering a range of other solutions beyond AE [automatic enrolment], not least because AE covers less than two thirds of the UK’s working population and because there are so many under pensioned groups – women, disabled people, those from an ethnic minority and many in the LGBTQ+ community.”
She adds: “There are delivery challenges – political, social and economic – in increasing minimum contribution rates, but these are not insurmountable.”
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