The UK pension system needs “major reform” to support pensioners and pension savers, the economy, and protect the environment, according to a report from the charity Finance Innovation Lab (FIL).

It stated that while policymakers were intent on significant reform to the pension system, more ambitious reform was needed as the system was not delivering decent, secure retirement incomes for all, or playing a big enough role in delivering a green transition.

To help address these issues, FIL called for a move to pension scheme models that share longevity and investment risks, and embed longer-term investment horizons.

One option put forward was making collective defined contribution (CDC) schemes the norm for those newly enrolled into a pension scheme, rather than DC schemes, and to transition existing DC schemes to CDC schemes, for example when consolidation occurs.

As part of this, FIL called for CDC schemes to be progressively calibrated to help those on low incomes achieve a decent retirement income.

Existing open defined benefit (DB) schemes should be protected or expanded if possible, the charity said.

FIL also argued that contributions of between 12 per cent and 15 per cent of income were needed, primarily through increased employer contributions, to support improved retirement incomes.

Making the system progressive will be “crucially important”, which could be achieved by setting higher levels of employer contributions for those on lower incomes and ensuring a minimum absolute contribution, offset by lower required contributions for those on higher incomes, FIL said.

It added that it was also vital to design ways of including those who are current excluded from auto-enrolment, such as the self-employed and those unable to work.

FIL suggested that the triple lock should be retained to provide a “decent floor” for retirement income, with consideration given to what an adequate and acceptable target should be, and that those with low contributions should be guaranteed a decent state pension.

Furthermore, the charity said the need to proactively and rapidly ‘green’ the pension system was needed, calling for the setting of green investment targets supported by a ‘green industrial strategy’.

“We also need to begin excluding fossil fuel investment from pension fund portfolios, starting with direct investments in fossil fuel expansion,” the report stated.

“Giving regulatory bodies stronger mandates to focus on the climate and nature impacts of the pensions system would help align regulation with key goals.

“Examining how to improve fiduciary duty, and the accountability of all actors in the pensions chain to the interests of beneficiaries – including their interest in a safe climate and thriving nature – will be important.”

FIL also argued that driving improvements in risk assessment by pension schemes and regulators will be a “critical step” to aligning decisions with climate science.

“We argue that these reforms would be beneficial for the UK economy as a whole, including through boosting the spending power of pensioners and enlarging the pool of capital for investment in the just, green transition in the UK,” FIL said.

“Appropriate consolidation could be used to help drive the system towards these goals, with not-for-profit models being the norm to ensure that bigger funds maintain a focus on the true interests of pension savers.

“We hope that this comprehensive review of how to fix the major problems in the UK pensions system, and proposals for a way forward are a useful contribution towards creating a system that truly works for pensioners and pension savers, the economy and the environment.”

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