Early retirement a thing of the past for UK’s 65 year olds

For half a cen­tu­ry the pen­sion pen­du­lum swung between two extremes, from work­ers pick­ing up a com­pa­ny clock at 65 to them dash­ing away from the work­place at the ear­li­est retire­ment oppor­tu­ni­ty.

Over the past two decades, it has swung back so far that the dream of ear­ly retire­ment may soon be a thing of the past.

A com­bi­na­tion of increas­ing lifes­pans and less gen­er­ous pen­sion arrange­ments, in par­tic­u­lar the demise of gold-plat­ed final salary or defined ben­e­fit (DB) schemes, means more peo­ple are work­ing longer, either from choice or because they sim­ply can­not afford to retire.

If you are under 40 now, then your retire­ment age is like­ly to be 70, and the num­bers retir­ing at 50 or 55 will be a tiny minor­i­ty

Accord­ing to an Office for Nation­al Sta­tis­tics (ONS) report in May, a record 9.67 mil­lion over-50s were still in work, while the num­bers tak­ing ear­ly retire­ment had fall­en from a peak of 1.6 mil­lion in 2011 to 1.2 mil­lion.

A ris­ing state pen­sion age and the scrap­ping of the com­pul­so­ry default retire­ment age, has also reduced the num­bers retir­ing under 65, prompt­ing insur­er Avi­va to pre­dict that by 2029 ear­ly retire­ment “would be rel­e­gat­ed to the dust­bin of his­to­ry”.

Avi­va sav­ings and retire­ment man­ag­er Alis­tair McQueen observes: “If you are under 40 now, then your retire­ment age is like­ly to be 70, so ear­ly retire­ment will be at 67 or 68 and the num­bers retir­ing at 50 or 55 will be a tiny minor­i­ty.”

ONS fig­ures show that a 65-year-old man today can on aver­age expect to live anoth­er 18 years and a woman 21 years, against 12 and 14 respec­tive­ly in 1950, and by 2039 one in twelve of us will be aged over 80.

That increased longevi­ty is an expen­sive mill­stone for com­pa­nies with DB pen­sions, offer­ing a guar­an­teed income based on salary and length of ser­vice, which pro­vid­ed the bedrock of retire­ment plan­ning for mil­lions of Britons in the last cen­tu­ry.

While such schemes remain com­mon in the pub­lic sec­tor, where they are fund­ed by tax­pay­ers, in the pri­vate sec­tor they are being phased out under the strain of life expectan­cy, eco­nom­ic tur­moil, volatile invest­ment mar­kets and high­er reg­u­la­to­ry bur­dens.

Accord­ing to the Pen­sion Pro­tec­tion Fund (PPF), the lifeboat which has res­cued 800 schemes since 2004, there are cur­rent­ly almost 6,000 pri­vate sec­tor DB schemes of which near­ly 5,000 are in deficit, a poten­tial source of con­cern for the 11 mil­lion peo­ple – pen­sion­ers, deferred mem­bers and active mem­bers – depend­ing on them to fund most or part of their retire­ment income.

Pen­sion ser­vices provider JLT Employ­ee Ben­e­fits cal­cu­lates the com­bined deficit – the gap between assets and lia­bil­i­ties – of pri­vate sec­tor-schemes was £341 bil­lion in June, up from £241 bil­lion a year ear­li­er.

For FTSE 100 com­pa­nies, the total deficit was £117 bil­lion, up from £75 bil­lion, reflect­ing the mam­moth deficits at major employ­ers such as BT, BP, Roy­al Dutch Shell and BAE Sys­tems.

BT has the largest pen­sion deficit of FTSE 100 com­pa­nies, val­ued at £9.9 bil­lion in June 2015

JLT direc­tor Charles Cowl­ing says: “One of the prob­lems is that a lot of the big deficits are with old econ­o­my busi­ness­es fac­ing com­pe­ti­tion from new econ­o­my busi­ness­es with­out any of these lega­cy pen­sion lia­bil­i­ties.”

It has been esti­mat­ed that 1,000 schemes may even­tu­al­ly turn to the PPF, but Mr Cowl­ing expects those backed by sol­id busi­ness­es to sur­vive, adding: “Although it will be painful for a large num­ber of com­pa­nies, it will be man­age­able. Five out of six will man­age it, but for a sig­nif­i­cant minor­i­ty, if the writ­ing is not on the wall, it soon will be.”

Many com­pa­nies are so entwined with their pen­sions that the deficit casts a long shad­ow, high­light­ed by the col­lapse of BHS and the strug­gle to find a buy­er for Tata Steel UK.

Funds and com­pa­nies are bol­ster­ing assets and reduc­ing lia­bil­i­ties by increas­ing con­tri­bu­tions to record lev­els, pro­tect­ing invest­ment returns and scal­ing back mem­bers’ ben­e­fits.

Most firms have pulled up the draw­bridge on DB schemes of which just 13 per cent are still open to new mem­bers, accord­ing to the PPF, while about ten mil­lion peo­ple are now in less-gen­er­ous defined con­tri­bu­tion (DC) or mon­ey pur­chase schemes, which build up an invest­ment pot to pro­vide a retire­ment income.

Mr McQueen says some­one on £30,000 a year in a DC scheme would have to pay in 25 per cent of their income to reach the £20,000 pen­sion they might have expect­ed under the old sys­tem, but he points out that 10 per cent is gen­er­ous under a DC scheme and half of that comes from the employ­ee.

Employ­er con­tri­bu­tions to the new schemes are often “pal­try”, accord­ing to Alan Mora­han, man­ag­ing direc­tor of pen­sion con­sul­tants Punter Southall Aspire. He says: “Income lev­els will be sig­nif­i­cant­ly reduced in rel­a­tive terms to those cur­rent­ly enjoy­ing their hol­i­days, cof­fee shops and vis­its to the sea­side because they became the acci­den­tal hold­ers of very sig­nif­i­cant pen­sion pots.

“That’s not to say it can’t be done, but we’ve got to get clos­er to the fund­ing lev­els of the past. We’ve got to get soci­ety to under­stand that if you don’t put much in, you won’t get much out.”

As well as reduc­ing future lia­bil­i­ties, funds must sus­tain invest­ment returns for decades to come; not an easy task in a glob­al econ­o­my reel­ing from the finan­cial cri­sis, with volatile share prices and low bond yields as cen­tral banks try to extin­guish the firestorm through his­toric low inter­est rates and quan­ti­ta­tive eas­ing. The Brex­it vote has only added to mar­ket uncer­tain­ty.

Some com­pa­nies have tack­led the prob­lem in imag­i­na­tive ways, such as Dairy Crest, which trans­ferred mil­lions of pounds worth of mature cheese into its pen­sion fund, and Dia­geo doing some­thing sim­i­lar with matur­ing malt whisky.

One solu­tion is for com­pa­nies to divert cash from the busi­ness and share­hold­ers into their pen­sion fund, but Dar­ren Red­mayne, head of advi­so­ry firm Lin­coln Pen­sions, warns: “You have got to be care­ful not to kill the goose that lays the gold­en egg.”

Gra­ham Vidler, direc­tor of exter­nal com­mu­ni­ca­tions at the Pen­sions and Life­time Sav­ings Asso­ci­a­tion (PLSA,) con­cludes: “Is ear­ly retire­ment doomed? Yes, for all but the wealthy few.”

This year the PLSA launched its DB Task­force to exam­ine prob­lems fac­ing the sec­tor and, ahead of its find­ings, Mr Vidler says answers are need­ed to key ques­tions such as, “Would we be bet­ter served by a small­er num­ber of high­er qual­i­ty schemes and has the build-up of leg­is­la­tion over the years, which was well inten­tioned, had unin­tend­ed con­se­quences?”