It will come as no surprise to hear that the UK's population is ageing. The Office for National Statistics predicts that more than 24% of people living in the UK will be aged 65 or older by 2042, up from 18% in 2016.
Although an ageing population is a major achievement of modern science and healthcare, understandably, the rise in the UK's ageing population is raising concerns about retirement and the sustainability of pensions. Here we consider how employers may need to adapt their pension provision to meet the demands of an ageing workforce.
Living and remaining healthier for longer
If people are living longer, there is greater need for sufficient pension savings to fund a longer retirement. However, with the decline of defined benefit pension plans and the introduction of defined contribution savings, the amount that younger generations are saving today may prove insufficient to fund a long retirement. The introduction of auto-enrolment has seen more people beginning to save for retirement, but average pension contributions remain low. Contributions will probably need to increase significantly if younger generations are to build up a retirement pot which will see them through retirement.
Further, with the advances made in life sciences (sciences concerned with the research, development and manufacture of pharmaceuticals and medical products), it is likely that people will not only live longer, they will also remain healthier for longer. Organisations such as the National Innovation Centre for Ageing (NICA), a life sciences centre, set up with funding from the Government and Newcastle University, which forms part of the "Helix" development in Newcastle upon Tyne, provide leadership in ageing research and development by developing, testing and bringing to market products which help to promote healthy ageing as we grow older. This appears to be indicative of the direction of travel in the UK.
As a result of people living and possibly remaining healthier for longer but not having sufficient pension savings to retire, we could see a move to 'active ageing' in the UK. Active ageing is a response to the challenges of an ageing population and broadly involves people working for longer and postponing retirement.
Active ageing is more likely to affect the generations following 'baby boomers' as the majority of these people will have defined contribution savings rather than defined benefit savings. The work of NICA is intended to help to facilitate active ageing with working practices and transport being adapted to reflect the age of the employee.
Possible impact of active ageing on pensions
If the UK does see a trend towards active ageing, employers should be mindful of the likelihood of more of their employees deferring retirement and working for longer.
The Organisation for Economic Co-operation and Development (OECD) has recently published a report (examining the challenge to societies with ageing populations) which recommends that governments ensure that their old-age pension system provides more flexibility in work-retirement transitions.
An increase in active ageing could lead to a rise in employees requesting 'flexible retirement', where employees start to draw on their pension whilst continuing in employment. For example, some employees might decide to reduce their working hours as they get older and to take part of their pension whilst still working to earn extra income. The UK has already seen movement towards flexible retirement with the abolition of a fixed normal retirement date and the flexibility for employees to commence their pension whilst continuing to work. If flexible retirement is demanded by more members, pension plans may need to review their policies to determine whether they can provide it.
Members taking flexible retirement and continuing in employment will need to be offered access to continued pension provision. However, current auto-enrolment legislation makes it more difficult for older people to save as, to be eligible for auto-enrolment, one of the conditions is that employees must be under state pension age (SPA). Those over SPA but under age 75 will not be auto-enrolled and will therefore need to opt in to pension provision. If employees are working for longer, this will need to be communicated to them in advance of reaching SPA age so that they can opt in to being enrolled into a qualifying pension plan.
Employees who are over age 74 do not have the right to be auto-enrolled into, or to join, a qualifying pension plan. Accordingly, no employer contributions are required in respect of them.
If there is an increase in active ageing, we may see a change to auto-enrolment legislation, or more employers choosing to provide contributions for employees aged over 74 in order to retain staff. This would concur with the OECD's recommendation that governments ensure that their pension systems encourage and reward later retirement in line with increased life expectancy.
Increases to SPA may also impact on member choices and changes to the auto-enrolment regime. Recently a think-tank, the Centre for Social Justice, suggested raising SPA to 75 by 2035. In response, the DWP acknowledged that it is working towards "creating opportunities for people of all generations" but confirmed that "we will not be raising the state pension age to 75. Fact." However, successive governments have raised the age at which individuals can start drawing their basic state pension and the DWP has previously said that its policy will be to raise SPA “on a regular, planned basis in the future, because we are all living longer and we need to keep the state pension sustainable whilst maintaining it above the basic level of the means test”.
Communication with members
It will be important for employers to communicate clearly with members in the lead up to normal retirement age regarding the options available to them. With the potential to defer retirement, take flexible retirement or use other pension flexibilities that may be available (such as flexi-access drawdown), the retirement landscape is becoming increasingly complex.
Therefore trustees and employers may wish to consider advising members to seek independent financial advice about their retirement options. We have seen some trustees and employers offer a contribution towards payment for financial advice to ensure that their members are fully informed when making retirement decisions.
Please get in touch with your usual contact in the pensions team if you would like to discuss flexible retirement options.