The pension industry - and individual savers - need to rethink retirement
“Only a government could turn the fact that we’re living for longer and we’re healthier for longer on average into - oh my God we’ve got a crisis,” says Andrew Scott, professor of economics at London Business School and co-author of The 100-Year Life.
He’s responding to the fact that some people view the idea that most of us will live past 100 as a cause for concern rather than celebration.
This negative attitude is particularly prevalent in the pensions industry, where worries about how a 40-year retirement can be funded dominate the longevity agenda. It’s easy to see why, as we complete the shift towards DC it is increasingly clear that most people are not saving enough to retire at 65 and will need to continue to working past this point.
There just aren’t enough savings to solve the problem
But Scott argues that an over-reliance on increasing saving levels is misguided since savings alone cannot address the longer-life challenge.
He says: “There just aren’t enough savings to solve the problem. No matter what the nudges, no matter what programmes you have there just is no nudge big enough to solve the gap. And I think we just have to accept that.”
The new way forward
Instead, Scott believes we need to rethink our definition of retirement. The problem, he argues, is that we are still hanging onto the concept of a three-stage life – education, work, retirement – when in reality this model no longer exists. Instead, people are having a multi-stage life that could involve re-education and retraining later in life, and where retirement is no longer a cliff edge.
Indeed, research from State Street Global Advisors suggests that two-thirds of people are already expecting to work past traditional retirement ages, with half of these actively wanting to continue in the workplace.
There is a significant cohort of people who want to work longer
Alastair Byrne, senior DC investment strategist at State Street comments: “There is a significant cohort of people who want to work longer. For these people, the idea of complete retirement fills them with horror. They want more flexibility, they want more leisure time, and they may want to try a career that’s a new challenge but they’re engaging with work after traditional retirement ages because they want to.”
We need, therefore, to change our concept of retirement and realise that it is no longer the final part of a three-stage life. Instead, we need to reframe the conversation so we are saying to people ‘you’ve got an extra twenty years of life – how do you want to structure that life?’
This means that instead of a scary situation where we’re warning people that unless they save more they will have to work longer, we should be telling people they have the opportunity to work longer and then seeing how savings can help people design a late life career that works for them.
A step change for businesses
The challenge then becomes how to facilitate the work environment and create the opportunities to realise people’s desire to work longer but perhaps only for three days a week, or maybe in a completely different industry.
For businesses, this may mean rethinking the kind of benefits offered to people. Scott believes this means companies should be offering packages which include future promises about career breaks or more flexible working in later life
He explains: “Companies used to offer a DB scheme, they did that because it was a way of paying a lower wage now and deferring the payment.
“I think they’ve learnt their lesson not to offer DB because it is future money but instead they could say ‘come and work for me now and later on I will let you choose option a, b, or c which isn’t just about money it’s also about time flexibility’.”
Not everyone is saying they want to be working from 7:00am to 7:00pm five days a week
Byrne agrees, arguing that this approach would create a situation where people are happy to work for longer periods of time. He adds: “Then they’d have more choices about what they do and exactly the volume of work that they do. I don’t think everyone is saying they want to be working in an investment bank from 7:00am to 7:00pm five days a week in Canary Wharf - but they want to be more productive. They want the engagement of the workplace they want the fulfilment of doing something purposeful.”
Of course, there will always be a requirement for some sort of stable income in late life because at some point a person’s ability to earn and support themselves will diminish. Byrne believes that products that combine early stage flexible access to savings then merger into some kind of secure income that pays out money for life make a lot of sense.
What next for pensions
For the pensions industry, this new approach would mean a period of transformation.
The pensions industry is absolutely a part of the solution but not the only part
Scott believes that this multi-stage life means institutional pensions must stop operating in a silo – completely separate from other retail savings products. He says: “Of course, this means the pensions industry is absolutely a part of the solution but not the only part of the solution.
“Pensions is part of the three-stage life and as that third stage of life is becoming ill-defined, pensions become ill-defined… If you’re removing the tax relief on pensions it’s not clear to me that there’s a pension industry that is fundamentally different from a savings industry.”
The pension freedoms are helpful but we need to think through the use of those flexibilities
Byrne believes this means the industry must at last embrace the new flexibilities. He says: “That’s the challenge for the industry to come up with these flexible vehicles that allow people to save for their retirement needs, and have additional access. The pension freedoms are helpful in this debate - the fact people can access their money in more ways… but we need to think through the use of those flexibilities.”
He believes that simply allowing people to choose between a house and a pension does not go far enough. Instead we should consider allowing people to access money earlier in order to retrain for a new late life career path.
Better advice and better guidance
This splintering of the three stage life means that people will need more advice and guidance than ever before, particularly since the concept of using a replacement ratio to calculate how much someone should save is no longer helpful.
Byrne believes companies need to focus less on making people experts in investments and more on the different options available to them and how they can best be navigated.
It’s about what they are saving for and how much needs to be set aside
He concludes: “The advice and the guidance misses out some really fundamental things about the choices people face. It’s not about teaching them to be their own chief investment officer and to be making investment decisions, it’s about what they are saving for and how much needs to be set aside for that late life stage and how much you need for retraining.
“Let’s keep it to the important choices people can make and personalise it to their life not to complex things that are better left to the industry to deal with.”