denotes premium content | Jan 9 2009 Feature
posted 10 Oct 2005 in Volume 10 Issue 6
A workable solution?
Extending working life to ease the pension crisis
Harvey Cole,
If one thing is certain about the so-called looming problem of an ageing population (other than death and taxes) it is that a major part of the solution will be found in extending working life. Contrary to the popular impression, there is no direct connection between living longer and spending the extra years in ill health. Longevity is being accompanied by an almost matching extension of a fit and vigorous existence.
Indeed, many retired people are already seeking some form of active employment – often part-time rather than a full week – and not necessarily in the form of paid work. Voluntary activities and local clubs and organisations are increasingly dependent on elderly volunteers.
Even so, much more organised efforts to attract and retain people within the wider commercial economy will be necessary. The government has already taken some steps. Perhaps it is not yet widely realised, but the age at which women become entitled to a state pension is being gradually raised from 60 to 65 for all those born after April 1950. By April 2020, the threshold will have reached 65; every month, those born 50 years previously will find that their retirement dates have been put back by two months.
That will of course bring them eventually into a position of equality with the current male-retirement age for state-pension purposes of 65. However, it is not difficult to see that pressure will develop for a similar postponing of men’s qualification too, as continuing increases in longevity push up the length of time for which pensions have to be paid.
Other recent changes in the composition of the working population also point the way to the future. Over the past eight years, the rise of around five million in employment (almost 20 per cent) has been almost entirely accounted for by the growth in women working – up from nine million and now just about level pegging with male numbers. On the other side of the coin, a rise in early retirement and the rush in the 1990s to disguise rising unemployment with invalidity benefit, led to a reduction in the activity rate for males over 44. The rapid rise in student numbers also temporarily removed many more from active participation.
But a desire and willingness to remain in work will not of itself ensure the kind of upsurge in employment that will help cushion rising pension costs. Employers must also see benefits from keeping the services of older people.
As conditions tighten in the future labour market, this will gradually happen, but the process needs to be made much more transparent if, like too much training in industry, the burden is not simply left to others.
Moves are already afoot. The government is consulting over proposals to make employers give their workers six months’ notice (as a minimum) if they want to make them retire at 65, and there would be a right for employees to appeal against such a decision. Firms failing to comply would face some kind of compensation payments.
If they wanted those under 65 to leave, they would need to provide valid reasons in each case, but, apparently, such reasons would not be required in the case of those over 65.
Regulations on these lines are expected to come into force in October 2006, as part of the need to comply with a European Directive passed as long ago as 2000 and which is intended to remove discriminatory practices. This would also make employers consider requests from employees to continue working on a part-time basis.
All this appears to try and build a half-way house between helping those who want to continue working beyond retirement age while not removing an employer’s right to sack elderly workers, albeit with increased safeguards against arbitrary decisions. Much more work on the details seemsto be necessary before a satisfactory scheme emerges.
Additional costs to employers need to be considered. These go beyond the payment of continuing wages. It seems as though National Insurance (NI) contributions would also have to be paid, although the workers already drawing state pension would continue to be exempt from further payments themselves. Perhaps more significantly, other benefits financed by companies, such as health insurance and lump-sum payments for death in service would inevitably become more costly as the ‘over age’ proportion of the labour force grew.
The debate needs to be shifted on to showing the potential benefits to employers rather than simply concentrating on the rights of workers. For this to succeed, there must be incentives to retain staff. Already some companies like B&Q are finding that elderly employees can greatly improve personal contact with customers and are valuable in providing advice based on their long experience – although not all will be able to match their 91-year-old adviser who works a 31-hour week.
Financial attractions, in the form of reduced costs of employing older workers must however play a large part in making extension of working years effective. Given that elderly employees still make a contribution to the economy, and will continue to pay taxes, it should be possible to exempt employers from making quite substantial NI contributions, and to cap other benefits that they provide at levels that are still acceptable to the workers involved.
While those who want to continue in work – or, just as important, find a new and different job after starting to draw a pension – are now very largely self-selected, in future, we will need to increase the attractions of extending working life without exercising undue influence to do so.
For this to be done, financial incentives are again likely to be needed. This applies particularly to those relying largely on state-retirement benefits, not least because remaining in work will mean that they incur travel and other costs as a result.
This could be dealt with by extending personal allowances against income tax to cover such additional costs, but by also providing a significant improvement in the state pension itself, related to the extra time spent in employment.
At present, state pensioners are not precluded from paid employment, but their earnings do not qualify for any enhanced pension, and they cannot make further contributions anyway. Furthermore, the advantage from postponing the drawing of the pension is little more than derisory.
For example, a man who put off claiming his pension from 1998 to 2003 would have been entitled to start drawing it at the rate of just over £94 a week instead of £77. But that part of the increase simply reflects inflation and the upgrading of the pension as a result.
He would also have been entitled to an enhancement, calculated by a complex formula of one-seventh of a penny for every six days (Sundays are not included) by which pension has been deferred, multiplied by the original entitlement. In this example, the uprating is about £35 a week, making a total of almost £130.
The end result is that this pension would have started at an annual rate of £6,750, but he would have foregone about £26,000 over the previous five years and will be ‘recovering’ that at rather less than £2,000 a year. He would not, therefore, break even until he is well over 80.
For those able to contribute to a personal pension plan, the position is much better. They are entitled to contribute 40 per cent of their extended earnings, free of tax, to an annuity – and, in all probability, increased flexibility in the form in which benefits are drawn will be forthcoming before long in the shape of less restrictive official regulations. What is more, the contributions made each year can be converted into an annual income individually every twelve months.
Clearly, ideas for matching more closely the increasing supply of potential labour at the upper end of the age range with the growing shortage of experienced staff must result in innovative ways of capturing the potential opportunities and efficiencies in the market.
It is a medium-term problem and it would be wrong to expect immediate solutions. But it is encouraging to see that the possibilities for satisfying the needs of the economy, employers and those who would like to retain an active interest and experience into their later years are being explored.
Harvey Cole is
