Current issues in Pensions (1 November, Leeds): Review of session on 'The implications of Government's policies to extend working lives'
The implications of the Government's policies to extend working lives
Speaker: Sarah Mathieson, Policy Manager, the Institute and Faculty of Actuaries
Summary by: Michael Hendry
Savings must increase to deliver adequate retirement incomes
Sarah provided a summary of recent research by the Pensions Policy Institute (PPI) into the implications of Government policies to extend working lives. Previous reports had looked at the expected level of income needed in retirement and the use of housing as a retirement asset. This research looked at:
- Trends and barriers to working longer; and
- Modelling how much longer individuals might need to work and save to meet target levels of retirement income.
Government policies to extend working lives were borne out of the recent trends in longevity which led the Pensions Commission to conclude that society faced the following choices:
- Pay higher taxes;
- Individuals must save more;
- Individuals must work longer; and
- Pensioners become poorer.
The Government has already begun to set in train these policies by abolishing the default retirement age and increasing the State Pension Age (SPA) to age 68 by 2046. The presenter explained there was a debate around whether the automatic increases to SPA should apply based on a longevity index. Such a mechanism would pose difficult questions such as the choice of an appropriate index.
The PPI research revealed demographic trends, including the general increase in the average age of individuals exiting the labour market between 1984 and 2011. Employment rates of older women in particular, have increased in the last couple of decades.
On a practical level, the presenter explored the various barriers to longer working. These include:
- Exiting the labour market to care for an elderly relative;
- Il-health and disability; and
- Physical pressure of work in certain roles.
Sarah noted how the incidence of ill-health tended to be higher among manual workers. It would be interesting to discover, in a future study, the extent to which the employment trends differ between individuals in different regions and socio-economic groups.
The final part of the presentation looked at the adequacy of retirement incomes for individuals aged between 50 and SPA in England and Wales. The research had reached the following conclusions:
- Around 85% of people were expected to meet the Minimum Income Standard by SPA (representing a basic standard of living);
- Around 40% could meet a target replacement rate by SPA; and
- 45% of people may need to continue to work and save for at least eleven years after SPA to meet their target replacement rate.
It seems that a high proportion of over 50s will need to start saving more today if they want adequate retirement incomes. The study didn’t cover the situation for individuals under age 50 – this might be an interesting extension to the research.