Home > News > 2000 > May 2000 > Winning the Generation Game
Winning the Generation Game
Improving Opportunities for People Aged 50 to 65 in Work and Community Activity
by the Performance and Innovation Unit of the Cabinet Office
Introduction
According to government figures some 2.8m people between 50 and state pension age do not work. This is said to cost the economy £16billion of lost GDP per annum and £3 billion of additional expenditure. In addition people are living longer than ever before. The combination of these two factors mean that a reduced workforce is subsidising a growing retired population. As a result the government set up a task force to look into this problem and their report was published on 28 April. The report can be found on the government's website at www.cabinet-office.gov.uk/innovation/2000/winning/winning_index_page.htm.
The report states its remit as being to:
- Assess the implication of the trend towards economic inactivity of people between 50 and state pension age; and
- Identify whether government should take action to enable them to remain in economic activity or participate in other worthwhile activity.
The report is substantial (117 pages) and covers a wide range of issues, in particular employment, pensions and voluntary work. The report gave 75 conclusions, of which ten were said to be key.
Barnett Waddingham has considered the conclusions of the report that impact on pensions, in particular occupational pension schemes. The headline pensions conclusions were as follows:
- Raising the minimum age at which an immediate pension is payable from 50 to 55 between 2010 and 2020.
- Improve the transparency of occupational pensions by showing the cost of early retirement in company accounts.
- Review the Civil Service retirement age to 65.
Background
The government analysis showed that one third of the people aged between 50 and state pension age do not work, amounting to 2.8m people as mentioned above. This is split in about equal numbers both between poorer and richer people, and between males and females. Some are voluntarily out of work, but not all. For males employment rates at older ages have fallen, whereas for women employment at this age has not increased to the extent it has at other ages.
Considering the population at each age it becomes clear that the problem is going to get worse. In the short term the post war baby boomers are now reaching 50, but longer term there are more people in their early thirties than in any other age group. This means that the problem will be distinctly worse in 20 years time.
Overall this causes the government significant financial and funding problems.
The government's vision for the future is for people over 50 to have more opportunity to contribute to society, be that by way of paid work, voluntary work or leisure activity, with the balance between each of these being a genuine choice for an individual.
To achieve this the government concludes it will have to improve opportunities for older people to work for longer, to change attitudes to retirement (instead of seeing it as the aim at the end of a working life people should learn to balance work, voluntary and leisure activities in different proportions throughout their lifetimes), and to reconsider how the system of pension provision affects the pattern of retirement behaviour.
It is of some concern that the government is considering "reconsidering the system" so soon after having undergone a fundamental pension review.
The report considers the actions the government can take to achieve this vision and sets them out in 75 conclusions.
Occupational Pension Schemes: The problems
Occupational pension schemes are identified as a cause of the problem through having helped encourage early retirement. The government claims the following:
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Occupational pension schemes give people higher level of income and therefore enable them to retire early. Somewhat surprisingly they describe this as a "perverse incentive" to retire early.
Given that the government's aim is to encourage more people to provide for their own retirement, we would expect this to be a cause for celebration. Taking action against occupational schemes would clearly make the government's financial problems worse.
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Most occupational pension schemes tend to specify a retirement age below state pension age and those who retire early tend not to have their pension reduced by an amount that reflects the full cost of the increased number of years of retirement. It claims that employers and shareholders do not realise the associated costs, which are facilitated by scheme funding surpluses.
In the past the majority of schemes did set retirement ages to dovetail with the state pension age, being age 65 for men and age 60 for women. When schemes had to change their benefits to treat males and females the same, they often chose a compromise solution. In our experience most schemes do have a normal retirement age of 65, but may allow retirement earlier than that without reduction, often from 62 or 60.
In our experience early retirement reductions are not set at generous levels. We believe most reductions are set with the aim of being "cost neutral".
The government goes on to consider encouraging defined contribution schemes on the basis that surplus does not build up in these schemes which will consequently reduce early retirements. We believe there are more fundamental differences between defined benefit and defined contribution schemes than this. Nor do we agree with the government's underlying assumption that most schemes have substantial surplus. However although we do not agree with the government's line of reasoning we support their conclusion that defined benefit schemes have other advantages and so should be encouraged.
In our view the public's perception of retirement being a step change from working life is partly a result of the design of defined benefit schemes and also of the Inland Revenue's position on partial early retirement. The pension from a defined benefit scheme is based on earnings in the period prior to retirement - at the most the period considered is 10 years. This means that a reduction in earnings due to a move to part-time or less responsible work can impact on the whole pension. In addition the Inland Revenue does not allow members to draw their pension whilst continuing to work for a company, in whatever capacity.
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There has been an increasing tendency for companies with occupational pension schemes to use early retirement as a tool with which to restructure a company.
This may be true. However again the government is starting from the premise that all schemes have substantial surplus and that the cost is not directly attributable to the manager who makes the decision. In our view, this is not true in the majority of cases. However we agree with the government that current perception is it is better to voluntarily retire an older person rather than make a younger person redundant.
Occupational Pension Schemes: The conclusions
The government concludes that radical reform is not appropriate. However they feel that "distortions" can be reduced by improving transparency, information, flexibility and incentives to stay in work. Their conclusions are set out as follows:
Transparency
This would be improved by better accounting, both in company accounts and in information sent to members. They also suggest that if a member is allowed to retire on an unreduced pension this should fall from the budget of the person agreeing to this.
Barnett Waddingham supports these conclusions. However we believe that this is already the position in many cases. In our experience companies are aware of the cost of early retirement, many trustees require the company to pay in a special contribution prior to making an early retirement offer. As mentioned above we do not agree with the underlying assumption that most pension schemes have surpluses.
In addition we do not agree with the government's assertion that adopting the new accounting standards set out in FRED20 will radically change this.
Information
Information should come from two sources: the government and pensions schemes. The government should provide improved publicity about the cost of pensions and information provided to members should include figures for early retirement. In addition the government should show the way by providing annual benefit statements to its employees.
Whilst we do not have any particular concerns about these proposals it is hard to see how this will change current retirement practice. If anything it is likely to result in members paying more towards their benefits (for example by way of Additional Voluntary Contributions) in order to be able to retire early. In addition this would increase the administrative burden on schemes, something we are very opposed to.
Flexibility
At present the system is not well set up for individuals to retire gradually, for example benefits are generally based on final pay so that working fewer hours or in a less responsible lower paid job may affect an individual's entitlement. The report concludes that the Inland Revenue, in conjunction with the DSS, should urgently review its rules to allow "downshifting". In particular the Inland Revenue does not at present allow an individual to take their pension whilst continuing to work with the same employer. This should be changed.
We wholeheartedly support the principles of these proposals. We look forward to seeing the detail for these.
Incentives to stay on
The Inland Revenue should raise the lowest retirement age from 50 to 55 between 2010 and 2020 when it increases state pension age for women. The report implies that at the same time the upper limit for retirement would also be raised from 75 to 80. The report goes on to consider raising state pension age from 65 but concludes that the main problem relates to retirement prior to that age. Raising the age would not help that and would cause further poverty for many people after 65 and so the conclusion is to leave state pension age at 65.
This is the main headline conclusion that has been reported in the majority of newspaper coverage. Those people fortunate enough to be able to afford to retire at age 50 are likely to be in a position to switch savings from pensions to, for example, ISA's to facilitate retirement at that age even if pension benefits cannot be taken until a later age. It is possible that people will see additional restrictions on retirement as a further reason not to fund pension benefits which would be contrary to the government aims.
Civil Service
In addition to occupational schemes the government does at least take a good look at its own employees. It is concluded that most departments currently operate a retirement age of 60, and that this should be raised to 65.
This would only achieve the aim if people want to continue to work until 65. Whilst it may be that civil servants wish to retire later and are being forced out at 60, this is not our experience of the private sector. In reality this may be an attempt to reduce the high cost of the civil service pension arrangements.
Conclusion
The report covers a number of issues. For pensions, the conclusions are not radical. However we are concerned about some of the differences between the government's views on the current funding and retirement policies of pension schemes against our experiences.
Louise Witts, May 2000.