Falling annuity rates mean many employees can’t afford to retire, reports Sarah Coles
The brief renaissance in annuity rates is over. After hitting a six-year high this summer, the decline set in again, and in the three months from October 2008 to January 2009 alone they fell a startling 5%. This is a blow for many retirees, who have already seen falls in their pension pot of up to 40%. It leaves many individuals with difficult decisions, and employers facing a growing number of staff who cannot afford to retire. The falls in annuity rates are due to a combination of a long term rise in life expectancy, and the dramatic cuts in the Bank of England base rate, which filter through to the fixed interest investments on which annuities are based. Neither of these is likely to change in the immediate future, and while interest rates will rise again in the medium term, the longevity part of the equation is going to get longer.
These trends mean many employees are going to defer retirement. The CBI and Pertemps Employment Trends Survey in September 2008, found that already 31% of employees reaching retirement age are asking to postpone retirement, and 81% of those requests are being granted. This will cause a number of knock-on problems for workforce management, and additional costs for employers.
Firstly, employers must rethink any plans to use early retirement strategically. Chris Noon a partner with consultancy Hymans Robertson, says: “Over the last 30 years, managing the workforce has included retiring people in a recession to cut headcount. This is difficult if they have a contractual right to retire at 65 and financially they still need to work.”
Secondly, employers will have to rethink work patterns. According to Noon, “the whole retirement proposition will change. People may go elsewhere or work fewer hours, but they may keep working.” This may not increase costs, but will create complexity in workforce planning.
Thirdly, employers will have to offer flexibility within the pension. Roger Breeden, a principal at Mercer HR Consulting, says: “People may want access in a different way, so for example, they may want some of the tax-free cash and defer the pension. Trustees and employers need to be sure the pension they are offering is flexible enough to accommodate changing needs.”
And finally, they will have to think about other benefits. Breeden says: “With older people in the workforce, there could be knock-on effects on other benefits such as healthcare and disability costs. Employers may not be able to fund certain benefits as well in future, and have to make decisions about the changes they make to keep costs under control.”
At the moment, those postponing retirement are doing so until the age of 65. Helen Dowsey, a principal in the Benefits Solutions division of Aon, says: “From an anti-discrimination perspective, the earliest an employee can be forced to retire is 65. After then they may have to leave whether they can afford to or not.”
However, before employers take on these extra expenses it’s worth wringing all possible value out of existing pension pots. For some employees there is a simple solution: shopping around for annuities. It seems obvious, but only around a third of retirees actually do this, and it can pay off.
Adam Stevenson, a senior consultant with Watson Wyatt adds: “There are also more members than one would realise who are eligible for an enhanced annuity.” With these, a retiree gets a better rate because of something in their lifestyle, such as certain illnesses, or if they have smoked. An estimated 40% of annuity purchasers would qualify for an enhanced annuity, and it can improve payouts by as much as 30%.
Employers can improve the take-up of these alternatives. Stevenson says: “Actively supporting members through this process is gaining acceptance. That can be through paper communications, online models and quotes, or retirement seminars.” This doesn’t just start at retirement. Stevenson adds: “Clients should think about talking to people about their objectives five or ten years before retirement to make sure they are on track.”
These measures will make enough difference for some employees to revert to their original retirement plans. However, as Noon points out: “For many it’s a drop in the ocean, and employers have to accept people will work later.” The only consolation is that while there are costs to an older workforce, they may turn out to be a lifeline.
Noon says: “The baby boomer bubble will filter through, and the working population will shrink. If you want productivity, you need labour, so employers will eventually welcome the right skilled employees working later.”
Priced out of retirement
- Only a third of people aged 55 and over will be able to retire at the date they planned
- 20% will be forced to work two to five years longer
- 15% will have to work five or more years longer
- Just under a third of those aged 45-54 will have to work longer than they anticipated
- 22% of those aged 35-44 will have to work longer than planned
- Less than 10% of those aged 18-34 were changing their retirement plans