As the UK faces mounting concerns over retirement security, Chancellor Rachel Reeves is poised to unveil a significant overhaul of the nation's pension system in her upcoming Mansion House speech on 15 July 2025. This move comes amid growing calls from experts and think tanks urging the government to address the pressing inadequacies in pension savings and auto-enrolment rules that currently jeopardize the financial futures of millions of workers.
At the heart of the proposed reforms is the establishment of a commission tasked with reviewing the adequacy of the pensions system, including the savings patterns of the self-employed, the state pension, and the contentious auto-enrolment contribution rates. This initiative, initially announced after Labour's general election victory in July 2024 but postponed due to backlash from a taxing Budget earlier this year, signals the government's renewed commitment to tackle what many describe as a pensions crisis.
Under the current auto-enrolment framework, employers are required to contribute a minimum of 3 percent of qualifying earnings into their employees' pension pots, while employees themselves contribute 5 percent, totaling an 8 percent contribution on earnings between £6,240 and £50,270. However, experts warn that these rates are insufficient to ensure a comfortable retirement for most. The influential Institute for Fiscal Studies (IFS) recently highlighted that nearly 40 percent of private sector pensioners face a 'cliff-edge' in retirement, with inadequate savings to maintain their living standards.
The IFS has called for decisive action, recommending an end to the current system where employer contributions are contingent on employee contributions. Instead, they advocate for all employees to receive at least 3 percent of their total pay from their employers, irrespective of their own contributions. This change aims to provide a more reliable and substantial pension base for workers, particularly those in lower-income brackets or with irregular employment patterns.
Tom Selby, director of public policy at AJ Bell, echoed these concerns, stating, "In an ideal world, current contribution rates would be increased because the levels are too low to deliver a decent retirement lifestyle for most people." Yet, he cautioned that raising employer contributions now could provoke resistance from businesses already burdened by increased costs, such as the employer national insurance hike introduced in April 2025. Jason Hollands of Evelyn Partners similarly noted that businesses might struggle to absorb additional pension-related expenses amid current economic pressures.
Beyond increasing contribution rates, some experts propose lowering the minimum age for auto-enrolment from 22 to as young as 18. David Robbins, director at risk and insurance group WTW, emphasized that enrolling younger employees could significantly enhance their pension outcomes due to the benefits of compound interest over a longer saving horizon. Additionally, Robbins suggested that pension contributions should apply to earnings from the first pound rather than starting at £6,240, thereby ensuring that all earnings are pensionable and boosting overall savings.
While the government’s Pension Schemes Bill aims to stimulate the UK economy by altering how pension funds are invested, critics like Steve Webb, partner at pension consultants LCP, warn that the primary objective seems to be economic growth rather than improving individual pension pots. Webb pointed out that even after decades, the government's own projections indicate only a slight increase in pension savings for individuals, a sentiment echoed by Tom Selby, who cautioned against conflating economic ambitions with long-term retirement security.
Labour’s forecast suggests that in the best-case scenario, these reforms might add a mere £5,000 to an average pension pot over 30 years—a modest improvement that falls short of addressing the UK's under-saving crisis. This shortfall has prompted calls for more urgent and substantial measures to increase pension contributions and improve the system's sustainability.
Rachel Reeves has also highlighted the state of defined benefit (final salary) pension schemes, noting that approximately 75 percent are currently in surplus, collectively worth around £160 billion. However, she points out that regulatory restrictions have limited businesses' ability to invest these surpluses effectively. In her Mansion House speech last November, Reeves proposed creating pension megafunds by pooling individual defined contribution schemes and merging local authority pension schemes to enhance cost-efficiency and investment power.
The government's review will also examine the state pension, presently set at £230.25 per week or £11,973 annually for those with 35 years of National Insurance contributions. Labour remains committed to maintaining the triple lock, which guarantees that the state pension rises by the highest of inflation, average earnings growth, or 2.5 percent, aiming to protect pensioners' income against the cost of living.
Former Work and Pensions Secretary David Gauke has weighed in on the debate, urging the government to provide a secure pension income and to accompany any increases in the state pension age with targeted support for those most affected. He also advocates for gradual increases in contributions from both employees and employers to bolster financial security in retirement.
Paul Johnson, director of the IFS, warned that policymakers risk complacency regarding pensions. He stressed that without decisive action, many working-age individuals face the prospect of lower living standards and heightened financial insecurity in retirement. Johnson emphasized that the IFS's recommendations aim to strengthen the state pension, encourage savings during financially stable periods, and assist individuals in managing their pension wealth effectively throughout retirement.
As the July 15 speech approaches, the pension landscape in the UK stands at a crossroads. The balance between supporting economic growth and ensuring adequate retirement savings remains delicate, with significant reforms on the horizon. For millions of workers, particularly those in the private sector and self-employed, the outcomes of these policy decisions will shape their financial security for decades to come.
