Both Tory and Labour parties have big plans for reforming the private pensions system, and both are focussed on getting pension funds to invest more in the UK. Unfortunately, both parties’ plans fall short of what is needed to fix our broken pensions system, and to make sure it works for pension savers and the environment, as well as UK Plc.

The starting point for reform should be improving outcomes for pension savers. The bottom half of the population holds just 1 per cent of pension assets and will be dependent on the state pension, which is low compared to peers.

Even worse, over 80 per cent of those that are saving into defined contribution (DC) pensions are not saving enough to expect a minimum income in retirement. As over two thirds of the population have these kinds of pensions, most people are now looking forward to insecure and low-income retirements.

Women are particularly disadvantaged, with lower expected private pension pots and greater numbers who cannot access the full state pension.

Solutions to these problems are well known, and need to be top of the policy agenda.

They include, over time, raising the contributions that employers make and introducing an absolute minimum level of contribution so that those who have very low-incomes can still save enough for retirement, as proposed by the Living Pension standard.

Those earning under £10,000 per year, currently excluded from automatic enrolment, should be brought in, as should other groups that face difficulties under the current system, including the self-employed.

Everyone currently saving for a pension faces a bleak and uncertain future unless far more is done to prevent dangerous climate change and nature destruction. Unfortunately, pension funds often fuel this problem: One estimate is that UK pension funds have £300 billion of capital in companies with a high risk of driving deforestation, and £88bn in fossil fuel companies.

The Climate Change Committee estimates that we need to increase our annual low-carbon investment from £10bn per year to around £50bn by 2030.

Pensions funds, which currently only invest four per cent of their assets in climate solutions, could play a key role driving this solution.

Regulatory improvements could help, in particular through ensuring far higher standards for risk assessment, given that research shows that current models are based on a woefully inadequate understanding of climate science.

However, policymakers could do far more, including by adopting a clear national, sector by sector strategy to drive investment opportunities, but also by asking more of pension funds, including moving out of investments that expand fossil fuel production and agreeing targets for boosting green investment.

Finally, we need to recognise that the transformation of the pensions industry over the past twenty years has led to the dominance of lower-risk, lower-return strategies, particularly from defined benefit (DB) schemes that are closing down.

However, making DC schemes the default alternative has also contributed to a lower-risk approach as savers bear the full risks not just of the investment performance of their savings, but also their own longevity risks.

It would be sensible to heed calls to make collective defined contribution (CDC) schemes more widely available, where investment and longevity risks can be shared among members, and funds have a greater incentive to invest longer-term and aim for higher growth thanks to the qualified promise they make to their members.

Politicians are right to focus on pensions policy, but they need to raise their sights and recognise that the current system is broken and needs bold reform. It’s time for a new approach that recognises that solutions that work for pension savers, the environment and the economy are not only possible, they are urgently necessary.

Read the Pensions Age article on the Finance Innovation Lab's reform proposals here.

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