The changes to state pension age (SPA) announced in yesterday’s Autumn Statement won’t have come as a surprise to many in the industry. By increasing SPA to 68 in the mid-2030s – about 10 years earlier than expected – and to 69 in the late 2040s, George Osborne expects to save £400bn over the next 50 years.
The Pensions Bill published earlier this year already outlined the government’s plans to link increases in SPA to increases in life expectancy by maintaining a ‘specified proportion’ of adult life in receipt of state pension, which was defined as one third in yesterday’s announcement.
While the changes reflect improvements in longevity, they are still on the conservative side. A man born in 1922 who survived until his 65th birthday in 1987 might have expected to live another 14.5 years, while a boy born in 2012 who lived to be 65 might expect to spend 27.7 years – almost twice as long – beyond that point, according to figures from the Office for National Statistics and kindly pointed out to me by JP Morgan Asset Management’s Paul Sweeting. As such, the Chancellor’s proposed changes – which could see people born in the 1970s retiring from age 69 – reflect demographic realities. However, they still leave people spending a far longer proportion of their live in retirement than they would have done a century ago when pensions were first introduced.
The move is both a necessary and overdue step by the government and the potential savings are huge. Meanwhile, as LCP’s Bob Scott neatly points out, many employers with legacy defined benefit schemes “will look with envy at the way the government can reduce its pension liabilities with a wave of the draughtsman’s pen, whilst their own pension promises are effectively cast in stone”.
What isn’t so clear is how the government and pensions industry can encourage more people to save in order to fund that 1/3 of adult life. Today’s twenty and thirty- somethings who will be directly affected by this, are not saving anywhere near enough for an adequate retirement. Auto- enrolment will help, but contribution rates remain far too low to make a meaningful difference.
I recently spoke to several defined contribution providers who told me the industry has all but given up on teaching people how to invest in their DC plan – or “become their own IFA”, as one put it, and instead believe a well-designed default can negate the need for investment knowledge. This step-change is probably for the best: people are more concerned about saving enough, not becoming investment experts.
But communication is still vital. While the matter of where people invest is becoming less important, the question of how much – and for how long – they save has just become more important than ever.
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