We're all living longer and the government has taken notice. What does it mean for retirement planning? Fiona Murphy finds out
The UK’s oldest woman, Grace Jones, was born in December 1899, making her 112 years old. She attributes her long life to a good diet, including never eating frozen food. She has lived through two world wars, six monarchs and 22 prime ministers. Her lifespan is phenomenal.
But she isn’t alone. She is one of around 10,000 female centenarians in this country (according to the Office of National Statistics at its last estimate in 2010) and this figure is projected to reach 71,000 by 2035. If we put this growth into context, over forty years ago in 1961, there were only around 500 women who had reached their hundredth birthday.
These examples of longevity might just seem like material for the Guinness Book of Records, but in general, we are all living longer. The ONS say on average, a man aged 65 will live to the age of 83, a 65-year-old woman to 85. But what does this mean in terms of financial planning?
The International Monetary Fund’s (IMF) recent Global Financial Stability report warns developed countries including the UK could see public spending double to maintain the living standards of the elderly, by 2050. And if people lived just three years longer than expected by this date, these costs could increase by half again.
Making predictions about life expectancy is becoming a real thorny issue. The IMF has warned that population forecasts have been underestimated so any measures in place are in real need of a shake-up. There doesn’t seem to be a standard approach to forecasting how long people will live.
In the meantime, George Osborne’s Budget announcement that the state pension age will be automatically reviewed to keep up with increases in longevity is a sign that government are well aware of this growing trend.
Aviva responded to a Department of Work and Pensions consultation on setting the state pension last year. Aviva pension manager, Edmund Downes says: “It’s not going to be as simple as saying general life expectancy has increased by five years, therefore the state pension age should go up by five years. It will be a balance between the increase in state pension age due to an increase in life expectancy, balanced again by labour market movements and the availability of work for people at extended ages.”
In addition, life expectancy can be informed by factors such as where you live, making the creation of any scale a challenge. A collaborative approach is needed.
Downes adds: “You would need people not just from the government actuary department saying these are our projected actuarial increases, it needs to be balanced against [views] from the health and care perspective and from the business community.”
The pension industry is sitting on a wealth of knowledge policy makers could use. Legal & General’s head of annuity product development Timothy Gosden agrees: “[Annuitants are] a different pool of people to the population as a whole [they’ve saved into a pension plan]. Our estimate of their life expectancy would be to age 90. L&G has a big pool of annuitants, so we’ve got a good idea of how long people are likely to live based on past experience.”
In addition, the government will face a number of challenges, including how often to review the state pension age, which Downes says should be every five to seven years, to keep up with increases.
And giving people time to prepare is crucial. Ten years is a reasonable timeframe. It would be unfair if any changes “take effect less than five years before retirement because that’s when people are in wind-down mode,” he says.
Living longer, working longer?
State pension changes are not the only way to combat the financial problems associated with increasing longevity. Recent legislative changes also include the removal of the default retirement age of 65. In theory, this means people can continue to work for as long as they need to. While this goes some way to solving the problem, it may not be an option for everyone.
Many people will have to leave work early due to “either ill health or the inability for elderly workers to retain their jobs” says Partnership’s head of corporate affairs Jim Boyd.
“People involved in manual work will be at most risk as the rigours of hard manual work and shift work take their toll and the possibility that employers may not be able to offer them suitable alternative employment.”
While a proportion of people will drop out of the workforce, we will also see an increasing number of people working beyond age 65. Some will continue to work because they want to, but others will do it because they have to. What more can be done to sweeten the bitter pill of a longer working life?
The International Longevity Centre UK (ILCUK) recommends government could consider graduating the state pension (starting it at a lower level and gradually increasing it) or promote existing opportunities more widely, such as deferring the state pension.
Research carried out by the ILCUK with Aviva found half of those (55%) polled would support a system where individuals could access part of their state pension early, in return for a lower pension when they retire in full.
But monetary inducements from the government are not enough to support the massive shift towards increased working lives. If people are working longer then employers will need to ensure roles are appropriate for an ageing workforce to combat the issues Boyd mentioned earlier.
Chief executive at ILCUK Baroness Greengross says innovative working holds the key: “A target based work pattern is one way of incentivising older people, so they have certain tasks they’re asked to do and it’s more flexible as to how they do them.”
In addition, she expects older workers to have a greater say in the design of their jobs. But she adds: “You can’t necessarily do the same tasks. You can’t necessarily go up scaffolding in your 70s, for example. “There are management and mentoring jobs. What we’ve tended to do is put people in a job and when they’ve reached 50, they stop being trained for another job. Employers need to go on retraining people so they can go on working in appropriate ways.”
But while such an approach would help many people there will always be those who fall through the net. Boyd warns: “While the average pension age goes up, if someone is ill and suffers from a series of morbid conditions which means they can no longer work, it will mean before they hit the standard pension age, they will be suffering a massive decrease in retirement income. They are very unlikely to make [this] up; in the future they’ll always be behind.”
Moving the goalposts
There are two clear, linked problems here. The first, is well documented, that people are unprepared for the fact they will have to support themselves in retirement for many years. But how can people plan when the goalposts keep shifting and they’re uncertain when they will retire?
As a starting point, Boyd says: “You’ve got to incentivise the savings habit. But what you don’t want is the Japanese [model] where people don’t spend any money because everyone is so desperately saving for the future which stifles the economy.”
Just Retirement’s director of external affairs Stephen Lowe agrees we need to get into the savings habit, but admits getting people to accrue more money into a pension pot is “easier said than done.” But he warns there’s a great risk that if we don’t do it on our own initiative then we could be compelled to. “When you look at public policy over the next 50 years, [it’s] going to shift towards compulsion,” he says.
An upwards trajectory?
As the baby boomers reach 65 and beyond, it could seem life expectancy will continue upwards. But, in the future the opposite could happen – longevity could peak and reverse back downwards.
Just Retirement’s head of business development Jan Holt explains: “Lifestyle choices mean many children alive today may not outlive their parents. They have sedentary lifestyles; their diets aren’t as varied.
“And you’ve got [pandemics] like swine flu and super bugs [for example.] There are theories that suggest going into hospital for things like routine stomach surgery has the potential to be more [damaging] to your life expectancy than cancer, heart disease and stroke.
“Some people say the real problem will be the fact we’re over-using antibiotics and we’re not able to contain some of these bacteria. And more people are nervous about things like immunisation.”
She adds: “There’s an argument to say [life expectancy] is not always going to go in one direction unless we see staggering advances in medicine.”
So, while the long-term future trajectory for longevity remains subject to debate it is clear that for the time being at least, our retirees are living longer.While we are likely to see changes to the State Pension to mitigate this trend it is clear that this is not just a job for government.
It will be interesting to see how the retirement industry as well as employers and the general public respond to increasing longevity over the coming decades.
'Pensions could veer off course'
‘Massive risk-off rush’
Slendebroek CEO since 2014
For clients and social change
Our weekly heads-up for advisers