Tomorrow’s pensioners face up to working — and saving — for longer

Earlier this month, China became the latest country to announce plans to raise its state retirement age — following on from a similar controversial move made by France last year. In fact, recent OECD analysis indicates that normal retirement ages are now set to be increased in three-fifths of OECD countries. 

Any changes in pension provision are, typically, deeply unpopular. But, without them, ageing populations combined with the paucity of private savings to adequately provide for life in retirement threaten disaster for the public finances of many big economies.

Jon Greer, head of retirement policy at wealth manager Quilter, says: “Governments around the globe are wrestling with the monumental task of making their pension systems sustainable for the long haul.”

Approaches to solving this problem vary widely, he notes. A common strategy, however, is a combination of tougher state policy — by raising the state pension age or reducing the generosity of benefits — and legislation to boost private pension provisions.

In the case of China, a decline in population will leave it short of workers. So, for the first time since 1978, China will, from January, begin to raise retirement ages that had been relatively low by advanced economy standards. For men, the age will rise from 60 to 63; for female blue-collar workers, it will rise from 50 to 55; and for female white-collar workers, it will rise from 55 to 58 years old. These changes, to be phased in over 15 years, have sparked indignation among younger people.

Like many other countries, China’s pension system is made up of three pillars: the state pension; voluntary employee pension plans from employers; and private voluntary pension schemes.

Pushing through rises in state pension age can be tough, though. Last year, President Macron of France forced through a phased rise from 62 to 64 with a requirement that the retiree had worked for at least 43 years to gain full entitlement. His policy was not well received: it led to widespread demonstrations and strikes — disrupting rubbish collections, trains and flight schedules and electricity production.

Others have met similar resistance. Mike Ambery, retirement savings director at UK pensions and insurance group Standard Life, points out: “France isn’t the only country that has seen protests on the issue . . . A proposed move of retirement age for New Zealand’s state pension from 65 to 67 met with heavy resistance politically and the policy has stalled.”

The UK devotes a smaller percentage of its GDP to state pensions and pensioner benefits than most other advanced economies — and its state pension is low compared with many. So occupational and personal pensions are an important source of pensioner income in the country.

Britain’s standard state pension pays £11,502 a year to everyone aged at least 66 who has 35 years’ worth of National Insurance contributions. However, the state pension age is set to increase from 66 to 67 between 2026 and 2028, and then to 68 between 2044 and 2046.

Could this be accelerated? The UK state pension will cost the Treasury £138bn in the current financial year — a figure that is expected to keep on rising. A review in 2017 therefore suggested that the state pension age rise to 68 should be brought by forward seven years to 2037-2039. 

Then, earlier this year, the International Longevity Centre said longer life expectancy and a smaller workforce would mean the UK state pension age may have to rise to 71 by 2050, while a paper published by the London School of Economics argued that state pension age should be increased to 68 “as soon as possible”.

That will leave new UK chancellor Rachel Reeves with some tough decisions to make during this parliament. But the government may also be looking to other models for inspiration.

Some countries have taken the leap to fully means test their state pension. For example, Australia has no universal state pension, as such. Instead, the Australian “Age Pension” is a state benefit that is available to those aged 67 and over who have limited income and assets. However, Australia also has compulsory “superannuation” workplace pension schemes, with minimum employer contributions that will rise from 11.5 to 12 per cent from next July. These have enabled a higher standard of living in retirement. 

Few countries have so much employer-funded provision. Ambery says: “We’re still a way off this level of contribution in the UK and attempts to means test our state pension would prove unpopular.”

Canada and Denmark instead offer a universal state pension which is then increased for poorer people with limited means.

Many countries are also looking to encourage longer working lives or greater flexibility, given how much life expectancy has increased across the world.

Germany, for example, offers partial pensions for people continuing to work part-time after retirement age. Other countries offer an early retirement age for reduced pensions, and a normal retirement age for full benefits.

In nations striving for more generous state pensions, the solution often lies in significantly ramping up funding. Greer at Quilter says: “Unlike the UK, which leans heavily on employer and individual contributions to private pensions, many countries achieve this through much higher taxation across all income groups.”

In the UK, the current approach still leaves six in 10 people feeling they are not saving enough and a third feeling anxious, according to insurer Royal London’s latest research. 

Sarah Pennells, consumer finance specialist at pensions and insurance group Royal London, advises such individuals to stay on top of their financial planning for old age, rather than leaving things blindly to fate or the state. “Reviewing how much you’ve saved helps you stay in control,” she says. “Even if you don’t intend to retire, establishing a date when you can financially manage your expenses without needing to work can serve as a significant motivator.”