Pensions World

As the Chancellor saves £60bn by raising the retirement age earlier, pension providers are lagging behind, says Anthony Hilton, Evening Standard

The most telling figure in the Autumn Statement delivered by Chancellor George Osborne in November was that extending the virtual wage freeze on public sector workers is projected to save about £1bn. But government will save £60bn by bringing forward by eight years to 2026 the trigger date at which the retirement age will go to 67.

It underlines the fact that when you look at how government spends its money and how it is likely to spend it in the future, you cannot miss the fact that health and social payments in various forms account for the lion’s share. And given the political storms which seem to erupt around even the most minor attempts to trim spending, increasing the retirement age seems to be only way to cut the total.

Work until you drop?

It has been a theme of this column since the financial crisis first erupted that the only way it could be paid for was by making the population work till 70. Currently nothing has been said about retirement at 68, 69 or 70, but we will not have long to wait. It has to be likely that future dates have already been pencilled in to be unveiled at a time the government thinks is opportune.

This suggests that adjustments are likely to become a familiar part of Budget statements as we struggle through this crisis. If that foreshortening of only eight years really is worth £60bn – and I have to confess to being deeply sceptical about all government forecasts of future “savings” – then there is even more to be gained or “saved” by hiking the retirement age further. If people on average live in retirement for 16 years then in rough terms every year of increase must be worth £120bn.

If you are an optimist, you should bet that the retirement age will be hiked every ten years, to 68 in 2036, 69 in 2046 and 70 in 2056. But this would only keep up with the current rate of increase in life expectancy. So if you are a realist, you would expect government to want to get ahead of the curve either by putting these hikes in at five not ten year intervals or more likely by bringing in a system where the retirement age goes up by three months every year, for as long as life expectancy is going up.

What is interesting, however, is how little of this has been taken on board by the pensions industry in the design of its products. One does not mean here the adjustment of retirement ages in existing defined benefit pension plans to keep them aligned to the state retirement age because that is a legal challenge for almost all of them and not something to be undertaken lightly.

Out of date

The surprise is how little activity there has been in the design of the savings programmes through which people build up the pension pot for retirement, in the lifestyling investment strategies of DC schemes and in the design of annuities. Almost all of these are designed to deliver at 65. It is already obvious that this will very soon become the wrong date.

What is obvious is that pension planning and execution needs to become more flexible. One of the weaknesses of pension products currently is their rigidity. This is as much the fault of the tax authorities as the pensions industry, but it means much of what is currently on offer is ill suited for changing circumstances.

The pensions of tomorrow – which means those being set up today – must be able to accommodate the whole range of individual circumstances which will unfold as we move deeper into this century.