The UK pensions system is facing a “critical” time as inequalities in societal factors are making it increasingly difficult for people from disadvantaged backgrounds to work a full career and save for retirement, research from the Pensions Policy Institute (PPI) has found.

The fourth edition of the PPI’s UK pension framework report analysed the link between rising inequality and the UK pensions system, looking at the factors which could increase the differences in retirement adequacy and living standards in the future, such as health, wealth, housing, employers and employment.

The report, published in association with Aviva, found the gap in life expectancy between the most and least deprived areas of the country stood at around ten years, while the gap in healthy life expectancy was 18 years. In addition, the PPI found disability is the fastest growing source of disadvantage in the UK labour market, with 23% of all working-age adults reporting a disability, compared to 16% ten years ago.

The institute added health inequalities make it harder for those from deprived backgrounds to save through a continuous career and added pressure on those who live longer to save more for their retirement.

The PPI also found increasing wealth inequalities were contributing towards differences in living standards in retirement. The report revealed while household wealth has risen from 300% of GDP to nearly 700% since 1991, the richest 10% of households have consistently owned half of the UK’s total wealth, while the bottom 50% have held approximately 10%.

In addition, the gap in absolute wealth between the bottom 10% and the top 10% grew by nearly 50% between 2011 and 2019, from £7.5trn to £11trn.

The report also showed a decline in home ownership as rising house prices and low wage growth make it increasingly difficult for younger generations to get on the housing ladder, which could lead to a rise in the number of people renting into later life. It found home ownership among those aged between 45 and 64 years old fell from 81% in 2002 to 64% in 2022.

Based on these figures, the PPI forecast that by 2040, 1.7 million pensioner households could be living in private rented housing, compared to 500,000 in 2024.

When assessing employment factors, the PPI found while the gap in pension participation between large employers and small to medium sized enterprises had narrowed to 10% since the introduction of auto-enrolment (AE). However, the report showed eligible employees of small and micro private sector companies had consistently lower AE participation levels at 81% and 56%, respectively, compared to larger employers (91%).

Furthermore, when analysing contribution levels, the report showed 69% of those working for companies with less than 500 employees received less than 4% employer contributions. On the other hand, 65% of workers who were employed by companies with more than 5000 employees received more than 4% employer contributions.

The PPI also found when it comes to eligibility for AE, around eight million workers currently do not qualify due to their age, not earning enough to qualify, or being self-employed.

‘Critical’ moment for pensions

The PPI said given these inequalities, the UK pensions system is currently at a “critical juncture”. It said while there have been reforms which have been implemented since the introduction of the Pensions Commission of 2004 have seen benefits to millions of workers, policy gains in other areas have “stalled” and a combination of gaps in coverage and “static” levels of contributions mean not everyone is saving enough for retirement.

The institute noted determining where future trajectory of the UK pensions system will depend on policies to build on successes which have already been accomplished, strengthen safety nets, and consider the emerging risks associated with disparities in wealth, health, employment and housing to help mitigate the risks people face when looking to save for their retirement. It added the government’s pensions review will be “critical” to improve the living standards people have in later life.

PPI senior policy researcher Anna Brain said: “A common theme is occurring around pension saving and the living standards people have in retirement. On one hand, pension reforms like AE and the new State Pension are helping to close historic savings gaps and lift retirement income among the poorest pensioner households. On the other hand, progress towards better retirement outcomes is under threat from risks that are emerging from differences in health, wealth, housing and work.”

Aviva managing director of wealth and advice Michele Golunska added: “We’re delighted to support the PPI in delivering this important report, at a pivotal time for the future of UK pensions. We are reminded that tomorrow’s retirement challenges are shaped by today’s trends in health, wealth, housing, and employment.

“At Aviva, our priority is to engage with our customers throughout their lives, to help them feel empowered and positive about their financial futures, but this can only happen if we, as an industry, keep pushing towards a truly fair and inclusive pensions system that works for all – today, and long into the future.”