The UK needs a far more radical solution if it is to defuse the perfect storm brewing over the retirement prospects of millions of people in the UK.
The proportion of workers relative to those taking their state pension is reducing steadily. Longevity has improved massively, leaving many trying to fund a retirement longer than their working career. The long bull market runs of past decades look increasingly like history, undermining personal saving and investment prospects.
Together with changing employment trends, generous occupational pensions are nearing extinction. As the current economic climate turns cold – Britain is far closer to going bust than anyone would have guessed just four years ago – dramatic spending cuts and even higher taxes are just around the corner, whatever the pre-election spin doctors are saying.
The gentle and protracted tinkering around the edges of pension reform of the last 20 years is not just fiddling while Rome burns but has become a contributory factor. There have been small steps in the right direction but while one ineffective pensions bill after another has given politicians the opportunity to claim they have addressed the problem, in reality, the flames are burning ever brighter. If more people could see through the smokescreen, the upcoming election would be fought on retirement reform as much as deficit reduction.
Here is one idea worth consdering. Why not move the age at which state pension is paid to, say, 75? At this point, it would be far more generous than the current level, and increasing with the higher of price or salary inflation. Up to 75, from whatever age the individual and their employer chooses, responsibility for funding is up to them.
The main strength of this idea is that people will know precisely what the state will provide and when, and the pot will be bigger – more than just poverty prevention, which is currently the case. Up to age 75, people will know their income provision is their responsibility and that the
period is finite, shorter and so more affordable. Some may choose to retire as soon as their savings allow. Many will wind down to full retirement
over time, working part-time. Others may work full-time right up retirement, either by choice or necessity if they have not saved sufficiently.
All this would require holistic reform, meaning changes to employment law to encourage and facilitate older working, measures to address the particular challenges for those in manual occupations and changes to long-term savings structures to improve flexibility and incentives.
I would argue these wider reforms are all perfectly achievable and many will be necessary even without the impetus of a bigger overhaul of UK retirement income provision.
I am not suggesting this is the only idea of merit in the search for ways to head off the storm but it is indicative of the scale of change we must
get working on as soon as possible – before it is too late.
John Jory is director general of the Centre for Retirement Reform