A piecemeal approach to leaving working life offers the best solution to the issues caused by lengthening lifespans and pressure on the state pension – writes Brian Smyth, head of benefit solutions at Ascot Lloyd
William Beveridge, the social reformer whose historic report served as the basis for the post-World War II welfare state, was thorough with his sums when it came to what would the government could afford in state pensions.
He worked out how long people would be unemployed, how much life would cost for each male and female, how long people could be expected to live and so on with absolute precision.
In the 70-plus years since then, the situation has changed profoundly. Developments have come thick and fast.
We had that phase of people wanting to take early retirement – sometimes as young as 50 – and then a lot of those individuals, having duly stopped work, getting bored and wanting to do something else. They hadn’t realised what giving up work would really be like.
We’ve also seen the demise of final salary schemes, to be replaced by money purchase – also known as defined contribution – schemes.
The biggest game-changer of all, though, is rising longevity. The average life expectancy for people in England rose from 75.9 years in 1990 to 81.3 years in 2013.
And if the average post-retirement lifespan rises from seven years (as it was when the welfare state was first designed) up to 20, and you have an aging indigenous population, the birth-rate is not sufficient – ignoring immigration – to maintain a level of stability.
The ratio of pensioners to workers has increased dramatically and as state pensions are paid from National Insurance Contributions, there has to be a finite limit.
State pension age of 70
Hence, a state pension age of 70 (as is the case in Norway) has been in the planning for a long time, and is the logical result of this extended longevity.
It’s not the only solution on the table, but it makes easily the most sense. The government could look at increasing NICs, for example, but that would be unpopular and immediate, whereas the impact of a higher state pension age won’t be felt until far into the future.
The only downside, though, is what’s known as the ‘cliff-edge drop’. Many people who retire suddenly – they’re at work one day, they’re not the next – find the transition too abrupt.
That’s why, following the eradication of the requirement to retire with ageist legislation, the idea of a cliff-edge approach has become rare. The fact that many people cannot afford to retire, or actually enjoyed what they do work wise, or both, has only made the cliff-edge retirement less appealing.
On the other hand, the phased approach – whereby an employee who is approaching retirement age can continue with a workload that is reduced gradually over a long period – has two-fold benefits.
Firstly, it provides people with the opportunity to adjust to life as a pensioner gradually; secondly, it gives them time to gather an understanding of how their outgoings are changing as well as how much income they’ll be needing in the longer term.
This last point is crucial, because while the concept of pensions is very simple, evidence suggests that most employees don’t understand that concept well enough to adequately plan for themselves in retirement.
A higher state pension age may be the warning sign many need to act, but how pensions work needs to be embedded far more deeply in the population’s collective knowledge.