The UK could be walking towards a "pension cliff edge", Mercer has warned, encouraging the government to "seize the opportunity" and step back in order to solve the issue holistically.

The firm’s report, a Road Map for Pensions and Long-term Savings, identified three main challenges facing the pensions industry: low standards of living for retirees, low productivity of long-term savings and the need to increase saver engagement.

It argued that UK has a "stark" pension problem, particularly when compared to other countries, with the UK ranking 13th out of 47 in Mercer's latest Global Pensions Index.

And with the estimated pension gap set to rise from £6trn to £25trn by 2050, Mercer warned that, without "urgent" reform from policy makers the UK will not be able to close this gap and millions of individuals will not have adequate funding for their retirement.

The report also highlighted gender and generational gaps, noting that only 3 per cent of millennial households with median income are projected to meet a "moderate" standard of living in retirement.

However, Mercer suggested that the current pensions review provides the "perfect first step" in helping close the gap, urging policymakers to "seize this opportunity and step back to look at solving this issue holistically to consider auto-enrolment, making assets more productive, the future of the triple lock, how we can make it easier to engage in the work force".

In particular, Mercer encouraged the government to speed up the expansion of auto-enrolment and increasing minimum statutory contribution levels to improve standards of living in retirement and support UK economic growth, suggesting 12 per cent as a target amount, which could boost pension contributions by £10bn annually.

It also stressed the importance of making savers' money go further, arguing that the fragmented nature of the UK’s pension system is currently leading to inefficiencies, with low productivity of savings.

Given this, Mercer said that it would like to see continued support for consolidation, to improve cost-efficiency and productivity of savings, strengthen governance standards and contribute to better outcomes for members.

This could be driven by speeding up the implementation of a consistent value for money assessment framework for DC schemes, changes to how the master trust market operates and measures to ensure that a wide range of options for DB schemes can be supported.

In addition to this, Mercer encouraged the pensions industry to explore the use of innovations in AI and for the government’s pensions review to evaluate the current state pension, including the triple lock measure.

Mercer UK head of wealth, Phil Parkinson, said, “We are slowly walking towards a cliff edge of challenges for pensions and long-term savings, but we have an opportunity to address these.

“In the UK, people are not saving enough to have a comfortable retirement, and the state pension will not provide the standard of living people expect.

"The cost of inaction now is likely to be borne by future generations. We are encouraged by the steps taken by the new government and welcome the pensions review. We now need to move quickly.

“To ensure people have a comfortable retirement, the government needs to expand auto-enrolment, address inequalities, and support productive asset investment to ensure everyone can enjoy a secure and comfortable retirement.”

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