Adrian Boulding and Bob Bullivant add their voices to the debate on how changing demographics is affecting the pensions industry
To: New pensions minister, Ian McCartney
From: Adrian Boulding, pensions strategy director at Legal & General
Subject: Pensioners are living too long
First things first. Congratulations to your party on winning the election and congratulations to you personally for being appointed minister for pensions.
Now for the important bit. Pensioners are living too long and you will need to do something about this. I reckon it will be the most important task you have to undertake as pensions minister.
Take a look at the facts. After the Second World War, when the UK and the rest of Europe were laying the foundations of modern social security, a man retiring at age 65 could expect to live for a further 12 years. Today, life expectancy has increased by five years for pensioners, so a man of 65 now expects 17 years in retirement.
We must ask ourselves whether it is right that Blair pensioners should expect the taxpayer to support them in leisure for so much longer than the Attlee pensioner did. I suspect not. Indeed, it is the sheer length of retirement nowadays that is making pensions scarcely affordable. The now infamous 75 pence a week rise in the basic state pension, that even the Prime Minister admitted was a mistake in the election campaign, was probably all that the Treasury could afford at the time.
But if you raised the state pension age to 70, all that would change. As you would only have to pay pensions for 12 years on average, rather than 17, you could afford to give pensioners the sort of increase that you would like to.
And the beauty of the solution is that as well as paying the pension for less time, the Treasury would also stand to receive a further five years of National Insurance contributions.
How appropriate that you are now part of an enlarged Government department covering pensions and the working age ' for a policy of raising the state pension age to 70 will create a number of issues for those of working age.
What we are talking about is reversing the current trend of early retirement, much of which has been involuntary. In our large and established industries, we have seen a raft of employers using early retirement as a way of downsizing their labour force. They deliberately target their older and more experienced workers believing them to be 'past their sell-by date'.
This is often unashamedly ageist, and as such, cannot be condoned. But we should still look for the commercial reality behind the prejudice. It is sometimes true that older workers are no longer capable of the job they are currently doing. But this does not mean that they cannot perform another role. The working age part of your department will need to address the cultural issue of re-training in later life, so that people can work on longer by moving on, not by staying stationary.
It is, of course, a tribute to our National Health Service that we are all living longer. I note also the priority that the Government places on further investment in the nation's health. This will only serve to fulfil the prediction of actuaries that we will continue to live even longer in the future.
By about 2030, I estimate that the life expectancy of a 75-year-old will be 12 years. Yes, that same 12-year figure cropping up again. This suggests that raising the state pension age to 70 will only be an interim step ' your successors may at some point need to raise it again, up to age 75, to maintain the length of retired period at 12 years on average.
If you do go down the road of paying a rather more generous state pension, but only starting from a more advanced age, then there will be consequences for private sector provision. The needs of our customers will change.
Many who still aspire to early retirement will seek to use the savings made by themselves or their employers in funded pension schemes as a bridging vehicle, to tide them over the period between when they stop or reduce their workload, and the time when their state pension commences.
Today's pension plans, even the new stakeholder pension, are not ideally suited to this. They are constrained by current thinking that our role is to provide a private pension for life, as a supplement to the State pension. Private pensions may need to be more flexible than this in future. They should incorporate a facility that will allow the holder to draw a higher level of pension in the early years, if they have retired before State pension age.
So, welcome to your new office. I would like to sign off this memo by sharing with you a crucial maxim of the pensions industry ' don't delay.
Normally we quote this maxim to potential new savers, alerting them to the fact that their early contributions are the most important, as they enjoy the longest period of investment growth. But I think the maxim applies to the Government as well. Improving longevity is making pensions increasingly expensive. Act now, and start the culture of working to a greater age before it is too late.
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