Over the summer, the government announced that the state pension age would reach 68 by 2039, not 2046. If this happens, thousands of people will wait longer for state pensions. But is this such a big change?
By itself, perhaps not. But the state pension is, for many, the largest part of their retirement income. When they can draw it will largely determine when they retire.
We cannot look at this in isolation. Overall state pension age will reach 66 by 2020 for both men and women. It will rise to 67 by 2028. This already means that more people will have to work for longer, if they are able. It creates both problems and opportunities for employers.
Experienced, motivated older workers with deep knowledge of their business offer real benefits for employers and the wider economy, especially as Brexit may well mean that there is a smaller pool of younger employees available. It means that workers themselves can plan for retirement on their terms, with more years spent in work to save for eventual retirement.
But what happens if employers have a workforce that does not want to keep working, but cannot afford to retire?
Even a full state pension, after 35 years’ national insurance contributions, will provide an income of about £8,300 per year at today’s levels, which is not that much to live on. How will people make up the shortfall?
For most people who will be affected by the increased state pension age, most of their pension saving will be in money purchase schemes. Under auto-enrolment their employer must contribute.
Risk is, however, on the employee. Pots buy what they buy when they are drawn. Auto-enrolment will help, but even a pot based on the ‘steady state’ contributions of 8% of qualifying earnings will not be huge. For many older workers there will not be time to build up enough to retire when they want to. Many do not start thinking about retirement, and how much to put away, until there is little time to save.
The issue for employers is that most jobs no longer have a legal set retirement age. They cannot simply make employees retire, even at state pension age. While employers may be able to justify an age, they are potentially open to grievances, complaints and claims from employees (including that of age discrimination) arguing they are being pushed out before they want, or can afford, to retire.
So employers may be faced with managing employees through individual incapacity processes, if this can be made out, taking time and money. And they still run the risk of claims.
Is there an answer? It is not a return to final salary schemes, with employers bearing almost all of the risk of pension promises? Nor should they necessarily be paying for financial advice for employees. But the current common model of simply paying minimum contributions and leaving retirement planning to employees is outdated.
The sooner retirement planning starts, the better. When does an employee want to leave work? On what basis: ‘traditional’ complete retirement, reduced hours, or a changed role? How much money will they need to save? Frequent communication of these issues throughout working lives improves the chances of employees retiring on their terms.
If there is any answer, then it is communication. Informed employees are likely to deal with retirement planning better, and give employers the best chance of managing their older workforces. Not all employees will listen, but some will, and that will make a difference.
Philip Woolham is senior associate at law firm Bevan Brittan