The Second Pension Commission's Interim Report – what does it say and what next?

The Second Pension Commission published its Interim Report setting out its findings so far and signposting its focus for its Final Report.  The key areas identified are: (1) undersaving for retirement – expect the Final Report to suggest adjusting eligibility criteria, income thresholds and minimum contribution rates for auto-enrolment (AE) and to look at tax reliefs and the impact of charging – in short asking for more from private pensions, (2) people not saving at all – expect something around self-employed workers, and (3) decumulation choices – expect a default mechanism to protect savers from withdrawing too much too quickly from their pension and a look at "lifestyling" when it comes to pension investments.  The Final Report is set to be published in Spring 2027.

Background

The First Pension Commission was appointed in 2002 and from that came a number of changes including auto-enrolment (AE), facilitating working later in life, and changes to the state pension.  The pension landscape has changed dramatically since then, with the decline in final salary pension provisions, the pension freedoms (from 2015), defined contribution (DC) assets set to overtake defined benefit (DB) funds by 2030 (with DC membership already higher) and over 14 years of AE.  What the Second Pension Commission looks at is what next against a backdrop of longer retirements (with the number of people aged 75 or over projected to double between 2025 and 2075), slower growth and falling home ownership – in short how is the country going to pay for retirement?

The First Pension Commission looked at the state pension, AE, and voluntary saving as being the basis for retirement savings.  The Interim Report reviews the current system to assess where there are challenges to adequacy, fairness and sustainability noting that voluntary saving (i.e. saving outside of the state pension and AE) has not happened and further home ownership is declining not only removing the home as an asset in retirement but also meaning rent is left to be paid in retirement.

What to expect?

In relation to the concerns identified in the Interim Report:

• Measuring pension adequacy – the Interim Report looks at replacement retirement income and the target replacement rate.  It agrees that the use of replacement rates in some form is valuable for middle earners, but minimum income adequacy may be more appropriate for those on low incomes.  That said the Interim Report advocates for a hybrid approach – a foundational floor provided by the new state pension, achieving a level of replacement income through AE and enabling contributions above the AE minimum levels. 

• Undersaving – AE has normalised pension saving with 9 in 10 eligible employees now saving into a workplace pension (up from 55% in 2012) and opt-outs have remained low (at 11% - leaning on natural inertia by automatically opting in), but despite the fact more people are saving they are not saving enough such that saving "has not improved enough to deliver the retirement many people expect", with around 4 in 10 working age people not saving enough to enable them to reach "adequate" retirement income levels and this number is expected to fall further. 

There are lots of factors that go into the size of a DC pot – contributions, tax relief (which can make up 2/3rds of a pension pot), investment returns and the cumulative cost of charges.  First contributions, under AE there is a legislative requirement to make pension contributions on 'qualifying earnings (i.e. income between £6,240 and £50,270) – the upper limit has been frozen since 2021-22 and with wages rising the value of AE contributions is falling in real terms.  The Interim Report signposts changes here as well as the minimum contribution rate and AE eligibility criteria.

The Interim Report notes that just a 1% increase in annual rates of return could deliver around a 30% increase in the size of a DC pot and also suggests that there needs to be a reconsideration of lifestyling (moving assets into less risky funds closer to retirement), reducing the amount of time that savers' pots are on a glidepath to retirement (which is currently 10-15 years before retirement).  There are comments around the impact of charging and the level of tax relief but no real indication as to where the Pension Commission may go on these issues.

• The participation gap - some categories in society are not saving for retirement – with only 17% of self-employed saving into a pension, falling to 4% for those who earn only from self-employment (AE does not currently apply to the self-employed). 

• Decumulation choices – since the 2015 pension freedoms an increasing number of those able to take their pension have done so, the report notes that "decumulation solutions that rely on engagement and decision-making for the vast majority of savers are not likely to be sufficiently effective" and that "many savers risk running down their defined contribution wealth too quickly".  In 2024-25, 48% of all DC pots were accessed via full cash withdrawal and 65% where the pot was worth less than £10,000.  The Final Report will look at understanding cash withdrawal decisions by pot size and total pensions wealth.  Separate to "cashing in" a pension is the default for many savers of maximising the tax free cash lump sum (where there is concern this impacts later life pension provision) and accessing pensions whilst working.

The Interim Report also notes that the shift to DC moves risk to individuals and decumulation expects an unreasonable degree of engagement, that "the confusion caused by the [introduction of the pension freedoms] needs to be resolved" and "a strong approach to turning pension saving into incomes to last throughout retirement should be in place by default".

What next?

Outside of the Second Pension Commission there is already a lot going on in the pensions area; (1) guided retirement (introduced by the Pension Schemes Act 2026 with trustees of DC schemes required to offer or partner on decumulation solutions), (2) the value for money framework (an initiative designed to assess value for money in DC schemes – looking at charges, investments and service so consumers can compare performance across providers), (3) consolidation (with collective defined contribution schemes and the introduction of a £25bn threshold for assets under management by 2030) and (4) targeted support (allowing firms to provide suggestions to consumers such as around the level of pension withdrawn from a pension pot). So, the Second Pension Commission will need to factor these developments into its Final Report.  However, the direction of travel does appear clear – recommendations to save more with changes to AE, a look at investments including lifestyling and an onus on providers and trustees to warn members around decumulation options. 

If the Final Report does recommend changes in these areas and if these are taken forward, they will impact PTL, FI and PI insurers – PTL in terms of the onus on employers with changes to AE and for trustees if more is asked of them when it comes to managing decumulation and/or make changes to investments (and an impact on PI for professional trustees), FI when it comes to any further obligations on providers to manage decumulation options and changes to investments away from lifestyling, and PI for advisers involved with pensions.

Although there was nothing in the King's Speech around pensions – the Second Pension Commission appears likely to make recommendations to shake up the industry further.