The UK pension system needs to be altered to encourage more consumers to save into schemes, according to the Institute of Directors (IoD).

In its Roadmap For Retirement Reform report, the IoD underlined the falling popularity of pensions as figures showed people are now saving more into Isas.

According to the study, the amounts paid into Isas rose from £35.7 billion in 2007 to £43.9 billion in 2009-10 while annual investment in pensions fell by 11 per cent to £22.9 billion in the same period.

Savers are put off by the amount of red tape surrounding pensions, according to the Iod, which makes schemes unattractive. In a bid to boost saving, the body has urged the government to radically reform the UK pensions sector and simplify the terms and conditions of pensions schemes.

Malcolm Small, senior adviser on pensions policy at the institute and report author, said: "The fact that so many people are either not saving at all for retirement or moving to other investment vehicles such as Isas is a stark illustration that the current architecture has lost public confidence.

"If we are to avoid millions of people facing poverty in old age, then we need to give them an attractive structure to save into, not simply order them to save."

The report also called for the government to raise the retirement age to 70 "sooner rather than later" to bring it in line with the rise in life expectancy.

Instead of the current plan to raise the state pension age to 68 in 2046, the IoD advocates increasing it in stages so that it eventually reaches 70 in 2044.

"We need to stop pretending to people that state or private pension architectures were ever designed to support a potential 30-year 'retirement' from an effective 35-year working life," Mr Small added.

It is hoped that, by introducing a higher state pension age, more people would be encouraged to increase their contributions in order to retire at an earlier age.

Other recommendations featured in the report include introducing a flat-rate, universal basic state pension and abolishing means-tested retirement income benefits.

Furthermore, the IoD has advocated the development of a formal savings policy for the UK to help combat the current debt culture which has emerged in recent years.

Otto Thoresen, director general of the Association of British Insurers, claimed that the new report has brought up a number of challenges for the pensions sector ahead of the introduction of auto-enrolment later this year.

He said: "We are all aware people are not saving enough for retirement and too many people are not saving at all. Auto-enrolment is an important opportunity to change that.

"Isas also have a role to play in encouraging long-term savings and their ease of access is attractive, particularly in economically uncertain times.

"However, Isas do not have the employer contributions and tax benefits that pensions offer and their charges tend to be higher than modern workplace pensions."