• If people retired at 74, the weekly state pension would be £320, double the current £160;
• Or conversely, the Government would save £50bn pa in state pension costs;
• As average life expectancy* in the UK is 81, only 7 years would be spent in retirement if we retired at 74; but for those aged 65 healthy life expectancy is 76 so only a couple of years of retirement would be spent in good health;
• But averages in life expectancy mask huge variances, with the wealthiest households expected to live 20 years longer than those in the most deprived areas;
• The Victorians invented childhood as we know it, and baby boomers have invented a new ‘retirementhood’ - but this is under serious threat;
• We’re reaching a tipping point for retired household income due to the shift from DB to DC, and three quarters of UK workers not saving enough to secure an adequate retirement income. Longer retirements will become even less affordable;
• This underscores the need to commit to a range of saving, behavioural and work life changes in order for future generations to have the better retirements they want;
• However, with the rise of AI and technological change, policy makers need to be thinking ahead to a time when pensions perhaps become irrelevant due to changes in the labour market, as it will take many years to migrate to any new system of wealth distribution.

Analysis conducted by Hymans Robertson, the pensions, benefits and risk consultancy, shows that if state pension age (SPA) had risen in line with improvements in longevity since the end of WW2 then individuals would now be retiring at age 74. Released at our Better Futures conference, which debates the challenges presented by an ageing society, the rise of AI and a lack of savings - it shows that the average man would now be spending an extra 9 years in work. 

Commenting, Jon Hatchett, Partner and Head of Corporate Consulting at Hymans Robertson, said:

“The debate over the state pension age has been raging. While UK average life expectancy is now 81, averages mask huge disparities. At one end of the spectrum the number of telegrams sent by the Queen to those reaching 100 has risen from 24 in 1917 to nearly 7,000 today. At the other life expectancy in the most deprived parts of the country is a couple of decades lower than more affluent areas.  Life expectancy improvements amongst all but the better off households have more or less stalled this decade, with many putting the blame on Government austerity measures.

“Given these ranges, it is right that we are not all retiring at age 74 today. People should not be ‘dropping down dead’ in the workplace. We looked at these figures to demonstrate just how much the situation has changed. It underscores the need to commit to the changes suggested by Cridland in his recent review of State Pension Age, and to bring forward the increase to 68 between 2037 and 2039.”

Commenting on the expectation to spend decades in retirement, Jon added:

“The idea of a ‘third age’ of retirement is a very recent cultural phenomenon. People love the idea of a couple of decades or more travelling, holidaying with friends and kick-starting new hobbies. But from a financial point of view, is that sustainable, particularly in the context of three quarters of workers not saving enough for retirement? These years of leisure come at a substantial cost, as highlighted by the deficits of most Defined Benefit (DB) pension schemes.

“As recently as the 1970s, 80% of retired households were subsisting on less than £10,000 a year in today’s money.  For typical pensioners it was a completely different world to the one they live in today.  The Victorian’s invented childhood as we know it, and the baby boomers have invented a new ‘retirementhood’, but without huge societal change it is under serious threat.”

Explaining why future pensioners may not be able to afford the luxury of a long-retirement, he added:

“Pensioners today can expect to live longer and wealthier lives than ever before. Workplace and private pensions have given a massive boost to retiree’s incomes over the last 40 years. But we’re reaching a turning point. While many more people are saving into a DC pension than ever before, thanks to auto-enrolment, DC savings are a fraction of DB. At the same time the number of people retiring with large DB pensions is set to dwindle in the coming years, with increasing numbers of DB schemes closing.

“It now takes around 50% of pay to fund a DB pension.  It is these DB pensions which have led to the lion’s share of the financial gains experienced by current pensioners.  When you look at AE, currently the default saving rate is 2% of pay. This is set to rise to 8% next year, but this still falls way short of what’s needed.

“3 out of 4 UK workers are not saving enough to achieve an adequate income in retirement**. We now need to save 17-22% of salary to meet income replacement rates, or work substantially longer. Are people prepared to put that much aside? And more importantly, can they afford to?”

Discussing whether Government spending can fill the gap, he added: 

“Currently the UK spends £100bn pa on state pension.  The trend is actually towards the Government trying to spend less on each pensioner, not more, to help balance the books.  Even with the triple lock in place, the long-term cost of the new state pension is £8bn a year less than previous arrangements.  Yet, the triple lock is under intense political scrutiny. 

“If current trends of chronic under-saving persist, the state pension will have to increase at a higher rate than earnings over the long-term, as there will be an increased reliance on state pension.  It will be politically unacceptable to have vast numbers of individuals below pensioner poverty levels of income.

“But these debates could all become irrelevant if predictions around other game changers, such as the rise of Artificial Intelligence (AI), play out. Some say this could lead to 1 in 3 of today’s jobs being automated***. At the same time, AI is anticipated to increase GDP growth by 10% (PWC estimate) over the medium term. So, the question then moves on from whether retirement income shortfalls are affordable, to what fiscal or other policy developments are required to ensure the benefits of more money in the economy are being shared? Otherwise, with the potential for job scarcity over the longer term, we risk an increasingly economically unequal society with heightened intergenerational unfairness.”

Commenting on the changes needed, he concluded: 

“In the short to medium term, given the lack of individual savings, and the demise of DB benefits, the Government, employers and individuals face tough choices.  Adjusting is going to take some doing.  Even more so in a way that leads to better retirements that is fair across generations.  It is much more than just a question of savings or the state pension age. 

“With proper long term leadership from Government, rather than continual tinkering, individuals and their employers could be encouraged to save more. However, as a society we need to be prepared to work for longer and retire when we can afford to.   But we need to do more than that:

As well as a stable long term savings platform, the Government needs to do more to help individuals live healthy lifestyles, so that they are able to work longer to help mitigate costs of remedial medical work by the NHS. 
We also need a joined up solution for long term care for the elderly and a framework for funding that. 
Finally, individuals need much better support both when saving and transitioning towards retirement to improve their decisions.  Leaving the labour market too early, or spending pensions too quickly, can lead to years of regret later.  Much better to find new roles where individuals can work part time for a while than have them forced to find a new job after several years or more in retirement.  This will make better use of their skills.

“To maintain the quality of retirement enjoyed by many today we need a change.  Because these types of changes take many years to bear fruit, we need it now.”

*”Period life expectancy” which does not take account of future improvements which will occur over people’s lifetimes.

**30% unemployment source: BoE analysis that 33% of jobs have high probability of automation over next few decades; and PWC UK Economic Outlook March 2017

*** The DC plans of close to 1 million savers have been analysed by Hymans Robertson’s Guided Outcomes platform.