In-depth research just completed by the independent Pensions Policy Institute (PPI) reveals that although today’s pensions landscape looks better than yesterday’s, a serious crisis is looming. If the UK is to avoid tomorrow’s pensioners being worse off than today’s, reform of state pensions is the priority.

The report says that the gap between rich and poor pensioners is wider than ever. In 1979 the income of the richest 20% of pensioners was more than 73% of the average national wage. By 2001, they enjoyed an income in excess of 81% of average national earnings.

But for the bottom fifth of pensioners the situation has worsened since 1979. Their income was 23% of average earnings in 1979 but by 2001 it had fallen to 21%.

The PPI’s report - The Pensions Landscape – highlights unclear responsibilities surrounding pensions that are storing up problems for the future. Government policy assumes individuals will do more to save towards their income in retirement. But the responsibilities of the state, employers and indeed individuals still remain largely undefined. The reality is many people are unable – or unsure of how - to act.

Alison O’Connell, Director of the PPI and joint author of the report said:

“Clearly there is no shortage of pension headlines at the moment. But behind the obvious short-term challenges lies a potential crisis of lower incomes that will be apparent only in the long-term.”

“At the heart of the issue are problems in the structure of state pensions. The Green Paper identified useful initiatives to do with private saving and working patterns. But our analysis shows that we also need debate, now, on what we want from state pensions in the future.”

The research shows that although the average pensioner income has risen since 1997, the wealthiest fifth of pensioners are three times better off than the poorest fifth. Worse, a quarter of pensioners live in relative poverty and the indications are that unless a change is made the divide between wealthy and poor pensioners will increase.

The basic state pension, now worth 15% of male average earnings, is expected to be worth as little as 7% by 2050.

Alison O’Connell continued, “To build on government initiatives in other areas, we suggest an open review of future ambitions for state pension policy. This would help to resolve the problems of means-testing, ensure the state pension is robust in this era of increasing life expectancies, clarify the long-term cost to the state of pension provision and give private pensions the right role.”