British employees have found a pragmatic solution to the pensions crisis: never stop working. A survey by Baring Asset Management says 10% of the working population, equivalent to 3.5 million people, have no plans to retire.
Those who do plan to retire expect to do so later. Last year, the proportion of people planning to retire between 66 and 70 was 5%, this year it is 11%.
There is also greater uncertainty about retirement. Nearly a third of respondents between the ages of 45 and 64 – “a critical age for the final stages of retirement planning,” according to Barings – said they did not know what age they would be able to retire.
One source of uncertainty is inflation, which reduces workers' spending power in their old age. The Bank of England governor, Mervyn King, recently said the consumer price index (CPI) could soon hit 5%. The retail price index (RPI) is even higher.
“We have seen the cost of living continue to rise, making retirement more expensive and resulting in many more people having to put retirement off for a few more years,” said Marino Valensise, chief investment officer at Barings.
Another symptom of the pension trouble in the UK is the move away from defined benefit schemes. Whereas most UK schemes used to guarantee an inflation-adjusted payout to all their members, the majority have now switched to defined contribution, meaning members pay in a set amount and receive a sum depending on their scheme's performance. This is a source of uncertainty for members of these schemes.
Underlying the pensions problem is the fact that people are living longer than ever before. Average life expectancy for newborn babies in the UK is now about 80 years, some ten years longer than in 1948, when the UK government introduced the basic state pension with a retirement age of 65 for men and 60 for women.
The government is planning to raise the retirement age for men to 66 in 2016 and bring forward the schedule for increasing it to 68. However, many believe this won't be enough to solve the problem. As well as an ageing population, there is a long-term trend towards lower birthrates in the UK, which means there are fewer young people contributing taxes to fund state pensions.
Barings also points to low saving rates in the UK as a factor in the pensions deficit.
“It is crucial that people take financial advice well in advance of their anticipated retirement, carefully assessing their investment portfolios, as this could make all the difference in the long run,” said Valensise.
©2011 funds europe