Former pensions minister and LCP partner Steve Webb has set out ‘three tests’ against which the second stage of the government’s pensions review should be judged.

Focusing on the adequacy of pension savings, Webb said the first test needs to be questioning whether the review is given a ‘free hand’, including recommending reforms which will cost the government money.

Most changes to the system, including getting people to save more, will have a cost implication, such as through higher costs of tax relief.

However, Webb said a proper review can only do its job if it is allowed to consider all options and has not been hamstrung by the Treasury from the start.

In particular, it needs to be able to set out a timetable for improving contributions over a realistic period, he explained.

Another question is whether the review will look at the whole pension system, and not just private pensions.

With the state pension representing such a large part of many people’s retirement income Webb said a proper review of the adequacy of pension saving would need to take this into account.

Lastly, the review also needs to look at wider issues around long-term and short-term saving in an integrated way

LCP said it is hard to look at proposals such as increasing contributions without thinking about what this means for those on lower incomes who may lack short-term savings.

Ideas such as ‘sidecar’ cash savings, integrated into the pension system need to be in scope of the review.

With a million more pensioners in rented accommodation expected in the next two decades, the potential for using pension savings to help build a house deposit should also be considered, he explained.

“This review is a once-in-a-generation chance to tackle the growing crisis of inadequate pension saving in the UK,” Webb said.

“To be effective, the review must not be nobbled by the Treasury from day one, but must be free to come up with its own recommendations — even if these cost money.

“It needs to take account of the whole pension system, including the state pension, which is so vital to many. And it needs to think about saving in the round, including short-term cash saving and saving for a house.

“One of the worst outcomes for today’s working age population would be to end up having to fund a rent out of a meagre pension pot, and this review is the chance to look at that issue as well”.

Damon Hopkins, head of DC workplace savings at Broadstone, said the launch of the long-awaited review on pension adequacy will mark a critical inflection point in the nation’s retirement finances.

“Hiking contributions is undoubtedly the fastest way to tangibly increase savers’ pension pots so they can enjoy a good standard of living in retirement and is likely to feature prominently in review,” he said.

“We face a huge retirement adequacy problem with profound social impacts following the OBR’s recent warning that low pension savings could lead to a greater reliance on the government to support pensioners via a benefits system which is already unaffordable.

“Understanding the role of the state pension and closing the pensions gender gap should also be an important focus of the review.”

Hopkins also said that while reforms should ultimately bolster the long-term financial security of workers, the government will need to be wary of the financial burden on employers.

“Given the recent increases in National Insurance contributions and National Minimum and Living Wage rates, employers will need to start considering how they manage potential increased pension costs across the medium-long term,” he added.

The Department for Work and Pensions is expected to publish three reports — ‘Analysis of Automatic Enrolment saving levels, ‘Analysis of Future Pension Incomes 2025’ and ‘Gender Pensions Gap in Private Pensions’.

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