One of the key themes of the Government's Pensions Green Paper was the need to encourage greater labour market participation among older workers.
Our analysis shows that delayed retirement could ind-eed have a significant impact on the savings gap but only if there is a massive shift in attitudes towards older workers. The Green Paper proposals, although they are a start, will not be adequate to achieve this.
Benefits for consumers and product providers
There is no doubt that delaying retirement can significantly increase individuals' retirement incomes.
Analysis by Oliver, Wyman & Company suggests that workers who spend an extra five years working part-time, living off their earnings but not making additional pension contributions can expect 40 per cent higher retirement incomes. This is due to the extra five years' investment growth of their retirement savings plus the need to fund five fewer years of retirement income.
Associated with this is a significant benefit for the financial services sector. Pre-retirement customers are the most valuable age group for the life industry. They tend to save the most, even if their incomes have already peaked, and they have better average persistency rates than younger age groups.
The extra time spent accumulating assets offers additional management fee income to product providers as well as increasing the size (and hence the provider's revenue) of the annuity that is ultimately bought.
A shift towards more flexible retirement options also provides new product opportunities. For example, some individuals will want to work only part-time in the run-up to their retirement.
Others will gradually reduce the number of days they work. This will increase the need for financial planning, with much greater demand for products such as flexible annuities, phased retirement and income drawdown.
Are the benefits achievable?
To encourage later retirement, the Pensions Green Paper proposed three main changes:
More generous incentives to defer drawing state pensions.
Increasing the public sector occupational pension retirement age to 65.
Outlawing age discrimination by employers (including banning mandatory retirement ages).
Will these proposals alone manage to change people's retirement decisions?
One of the few countries to have implemented similar reforms already is the US. In 1978, age discrimination laws were introduced which raised the earliest mandatory retirement age from 65 to 70 and in 1986, mandatory retirement ages were outlawed altogether.
Since the early 1980s, changes to social pensions gradually reduced the financial disincentives to working beyond age 62 so that, by 2004, workers who delay their retirement will be fully compensated through increased pensions when they do eventually retire.
Finally, the US was one of the earliest countries to see a shift in private pensions from defined benefits, which often provide generous terms for early retirement, towards defined contributions, where employees bear the full costs of retiring early.
The impact of these changes has been significant. The proportion of 55-64-year-olds working or looking for work had been falling from 62 per cent in the mid-1960s to 54 per cent in the mid-1980s.
But since the reforms, this decline has reversed so that by 2002, participation rates had returned to their 1960s levels and look likely to continue rising.
An even more striking change was seen in New Zealand, where the state pension eligibility age was steadily increased from 60 to 65 over the course of the 1990s.
During this time, the proportion of males aged 60-64 who were working or looking for work increased from 34 to 53 per cent.
Previous labour market reforms and strong economic growth have also driven an increase in UK elderly participation rates, although to a much more limited extent.
Since 1997, male labour market participation has risen from 72 per cent to 74 per cent among 60-64-year-olds and from 7.5 per cent to 8 per cent among over-65s.
The reforms to state and public sector occupational pensions announced in the Green Paper may encourage some continuation of this trend but they are unlikely to lead to changes on the scale observed in New Zealand (or even the US) for three reasons.
First, whereas the New Zealand proposals prevented early drawing of state pensions, the Green Paper merely evens the playing field between early and later retirement. Second, compared with New Zealand, the UK state pension accounts for a smaller (and rapidly declining) proportion of retirees' income, so changes to the eligibility rules will have less impact.
Finally, the reforms to public sector occupational pensions will only apply to new employees joining after 2006, meaning that they will have little impact on retirement decisions before 2036.
Changes in attitude are key
The change to the law on employee discrimination has the potential for a much more significant impact on retirement behaviour although only if implemented as part of a broader package of measures.
Researchers point to two groups of workers who are particularly likely to exit the labour market in their 50s. The first group are members of occupational pension schemes which offer generous early retirement options. Employers often provide these options so they can replace older, more expensive staff with cheaper, younger new hires.
The depleted state of many occupational pension funds has led some employers to curb early retirement but it still remains a fairly widespread benefit.
The second group are unemployed or have been made redundant, typically from a declining sector of the economy, and have drifted into inactivity due to the difficulty of finding a new job.
Changes in discrimination laws alone will not be sufficient to draw either group back into the labour market. Changes will also be needed in the attitudes of employers and employees.
If employers perceive the benefits of retaining older workers, then they will phase out early retirement incentives on occupational pensions and will be more willing to take on older workers who have been made redundant.
In many cases, the employees will also need to be more flexible, accepting jobs in new industries where necessary and sometimes with less responsibility or lower pay.
The Government already publicises success stories such as B&Q, Tesco and Domestic & General Insurance, which have all concentrated recruitment and retention efforts on older workers, citing factors such as their stronger interpersonal skills and better retention levels.
But more can be done. Older workers need to recognise that as their productivity declines, they may need to accept reduced wages. The Government can ease this process by subsidising older workers' earnings or by reducing employment taxes for them, as happens in several European countries. Support can also be provided in the shape of careers guidance and support with retraining.
Although the challenge of such attitudinal changes is significant, there are success stories. In Iceland, for example, where the standard retirement age is now 70, 90 per cent of men and 80 per cent of women aged 60-64 are working or seeking employment. As a result, men and women in Iceland look forward to one of the highest retirement income levels in Europe.
In conclusion, international experience suggests that extensions in working life are achievable in the UK. But success will require further Government action, including possibly unpopular measures such as across the board increases in state retirement age as well as greater efforts to change the attitudes of employers and employees.