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ROYAL LONDON POLICY PAPER 2. The Death of Retirement

ROYAL LONDON POLICY PAPER

The Death of Retirement

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ABOUT ROYAL LONDON POLICY PAPERS

The Royal London Policy Paper series was established in 2016 to provide commentary, analysis and thought-leadership in areas relevant to Royal London Group and its customers.

As the UK’s largest mutual

provider of life, pensions and protection our aim is to serve our members and promote consumer-focused policy. Through these policy papers we aim to cover a range of topics and hope that they will stimulate debate and help to improve the process of policy formation and regulation. We would welcome feedback on the contents of this report which can be sent to Steve Webb, Director of Policy at Royal London at steve.webb@royallondon.com

ROYAL LONDON POLICY PAPER

The Death of Retirement

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THE DEATH OF RETIREMENT

Executive Summary

Changes in workplace pension provision mean that coming generations of retirees could have a radically

different experience of retirement from their parents. Unless today’s workers begin to save significantly

more for their later life, many will find that the quality of later life enjoyed by their parents will be unattainable unless they work well beyond traditional retirement ages. For many people, continuing to work to these much higher ages may simply be beyond their physical capability. Without significantly higher levels of engagement in pensions, we may

be witnessing the ‘death of retirement’.

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In this paper we look at the workplace pensions into which millions of people are currently being enrolled. Whilst the average contribution rate into an old-style final salary pension was around 20% of total wages, the statutory minimum for a new automatic enrolment scheme is barely one third of this level. Previous pension levels will be unattainable at these contribution levels, so this paper asks what individuals would need to do in terms of longer working lives in order to address this shortfall. Our key findings are:

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Someone on average earnings targeting the ‘gold standard’

of a total pension of two thirds of their pre-retirement income, and securing inflation protection and provision for a widow/widower would need to work to 77 if they only contribute at the statutory minimum level; for an index-linked pension with no survivor benefits they would need to work to 76, and for a level pension they would need to work to 73;

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Someone targeting the ‘

silver standard

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of half their pre-retirement income would need to work just over 71 (index-linking, survivor benefits), just under 71 (index-linking only) or 67 (level pension);

We also consider what would happen to someone who doesn’t start contributing at the statutory minimum

level until later in life

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for example, someone whose first pension is an automatic enrolment pension at age 35 or 45.

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There are interesting parallels here with the situation in the US where few workers have ever had access to guaranteed salary-

related pensions. A 2013 survey found that 1 in 3 ‘middle class’ Americans were planning to work into their eighties because

they could not afford to retire, whilst a similar number thought they might never retire. See: http://money.cnn.com/2013/10/23/retirement/middle-class-retirement