The perfect storm?
The anticipated pressure on pension systems from ageing populations is the financial equivalent of climate change, says the World Economic Forum.
As the dust settles from the general election, amidst many remaining uncertainties one thing is clear: the plan to cut pensioner benefits proved a turning point in Tory party fortunes.
Reductions to the Winter Fuel Payment and the introduction of the social care cap (and subsequent U-turn) were always likely to ruffle some feathers, but the party’s commitment to abandon the State Pension ‘triple lock’ and raise the State Pension age to “reflect increases in life expectancy” were also among policy proposals that appeared to be soundly rejected by previously core voters.
Balancing the needs of older generations who want their state entitlements protected, with younger voters who want to see wealth redistributed, is an act Mrs May’s manifesto plans clearly failed to pull off. Yet the pressure on the welfare budget will only become more acute unless this government, or a future administration, can introduce systemic pension reform and clearly communicate changes without provoking a backlash from voters.
Given the anticipated increase in longevity and the declining ratio of those in the workforce to those in retirement1, the government must consider how to raise the State Pension age, while fostering a functioning labour market to extend working careers as much as possible.
Although the UK’s retirement age is due to rise to 67 between 2026 and 2028, a new report by the World Economic Forum (WEF) has warned that further increases are needed if the UK is to adequately and sustainably support future generations. This echoes the findings of a separate independent review of the State Pension by former CBI boss John Cridland in March.
WEF says that the spiralling cost of providing security to those in retirement will imperil the incomes of future generations and set the UK and other developed countries on course for the biggest pension crisis in history.
WEF estimates that the gap between what people in the UK need during retirement and what they have is currently £6 trillion. If its forecasts turn out to be correct, the gulf will widen to more than £25 trillion by 2050.
With half of all babies born today expected to live to over 1002, the costs of providing retirement security is projected to rise to unprecedented levels, presenting many governments with what WEF calls a “pension time bomb”.
“The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change. We must address it now or accept that its adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren,” Michael Drexler, head of financial and infrastructure systems at WEF, said in the report.
While generous benefits accrued in final salary pension schemes, combined with higher-than-inflation rises to the State Pension, have led to a revolution in pensioner wealth, younger generations are unlikely to be as fortunate. They will, on average, spend more years in retirement but will receive less from their private pensions. Consequently, they may be more reliant on the state. Yet the State Pension is unlikely to become more generous in real terms.
“Clearly, it will fall on individuals to put more aside for retirement,” says Ian Price, divisional director at St. James’s Place. “If we don’t change our saving habits, we are all going to have to spend longer working, or we must revise down our expectations of what retirement looks like.”
“It’s almost certain that retirement ages in this country will rise, but by how much and how quickly will be an issue for the government to grapple with over the next parliament. The State Pension age could rise to 70 for today’s twenty-somethings, so a retirement age of 60 or 65 could soon turn out to be a privilege for the fortunate few,” he says.
1 Office for National Statistics, March 2017
2 The Human Mortality Database, 2016