‘State pension is unsustainable – it will have to pay less later’
Boss of life insurer urges workers to save more and take a realistic view of retirement, writes Melissa Lawford
Retirees risk receiving less of their state pension and having to wait longer for payouts because Britain’s system “can’t cope” with an ageing population, the chief executive of life insurer Phoenix Group has said.
Andy Briggs warns that the burden on state pensions will soon become unsustainable without significant reform, as he urges people to set aside money for their own pension pots.
The Phoenix boss, who oversees a company with 12m clients and £259bn in assets, says: “The state pension just can’t cope in the way that it was originally designed to do.
“Effectively, state pensions are going to have to be paid later and at a lower level, and people are going to have to make greater personal provision.”
He says the system is becoming overwhelmed by seismic demographic changes. When the state pension was first introduced in 1948, men retired at 65 and women at 60.
“At that stage, life expectancy for a man was 67,” he says. “So the whole thing was designed with a life expectancy in retirement of two years.”
Today, men retire at 66, with a life expectancy closer to 85 – meaning the demand on the state pension is growing ever greater.
The situation is going to get worse. Between now and 2050, the number of over-60s globally is going to double, according to the World Health Organisation. The number of over-80s globally is going to treble.
“The UK figures won’t be materially different to that,” says Briggs. “We aren’t going to increase the state pension age by seven or eight years, clearly. Therefore there is going to be pressure on the state pension. Either that, or the tax rates for those working will have to go up quite materially.”
Research from the International Longevity Centre suggests that the UK will need to increase the state pension age to 71 by 2050 to maintain the number of workers per retiree.
But this would not be enough to fix the affordability challenge in the system, says Briggs.
Ill health, disabilities and caring responsibilities often mean people fall out of the workforce years before retirement age. These people, who are disproportionately lower earners, will still need support from the state.
“There is a real need to examine the role the state pension plays, alongside other policies such as auto-enrolment and working-age benefits to develop a system that genuinely addresses the realities of inequalities in work, health and savings,” says Briggs.
The threat to the state pension comes on top of the fact the vast majority of people are not saving enough into their private pensions, Briggs warns.
Just as Britain is adjusting to having a bigger older population, it is also undergoing a shift from defined benefit pensions – where employers pay out based on a worker’s final salary – to defined contributions, where the size of a person’s pot depends on how much they pay in.
Many people retiring today will receive large defined benefit pensions, says Briggs, which means many are “in reasonable shape”.
However, that is all about to change. “Soon, the people retiring will be those on defined contribution pensions,” he says. “Only one in seven of these savers is doing enough for a decent standard of living.”
This means up to 17m people are likely not saving enough to retire when they want, with the income they want, according to Phoenix Insights.
Briggs blames this on a generational misunderstanding.
“They saw that their parents’ generation were fine with their state pensions and their defined benefit pensions, so they think they will be fine,” he says. “They don’t understand the reality. It was all taken care of but that’s not the case anymore.” Even so, the outlook is much better than it could have been. In 2012, then-chancellor George Osborne introduced auto-enrolment, which meant all employers became obliged to provide workplace pensions.
This has been highly successful, says Briggs: “We used to have 10m people saving for their retirement in the UK. Now we have 20m.”
But there are two areas where the system falls short. “First, it doesn’t yet cover the self-employed.”
This means there are 5m people outside of the system altogether.
The second problem is that the minimum contribution of 8pc of salary is too small, says Briggs. The UK average is about 10pc, whereas in Canada, the average is double. Briggs is calling for the minimum contribution to be raised to 12pc.
But the solution is not just about saving more. “We need to radically change the way that we think about working in later life,” says Briggs, who is also the Government’s Business Champion for Older Workers.
People need to think about working for longer, he argues, as most people do not understand how much money they have to retire on.
“My message to The Telegraph’s readers is that they need to take control of their own destiny on this,” he says. “If you’re over 50 and not working, at least make sure you really do understand the trajectory you’re on.”
In addition to increasing the state pension burden, the demographic pressures of an ageing population means more older workers are dropping out of the workforce.
One in five over-50s have major care responsibilities for an elderly relative. At the same time, many have to look after grandchildren. Employers need to make it much easier for them to remain in work, offering flexibility to reduce their hours or change which hours they work, says Briggs.
According to Phoenix Insights, 59pc of people in their 50s said older workers are being left behind by employers.
Briggs argues that businesses are missing out on a source of experienced workers who can play a critical role in boosting Britain’s economy.
“A lot of the businesses I talk to are struggling to get the skills and capabilities they need, and we have half a million over-50s out of work who want to work,” he says. “Let’s put those two things together.”
The way our pensions are invested also needs to change, to give savers better returns, says Briggs.
Over the past decade, a defined contribution saver in the UK got a net return of 4pc.
In Canada and Australia, the respective returns were 5.2pc and 5.5pc. “That’s basically a third more income in retirement if you’re Canadian or Australian compared with the UK.”
The key is moving more of Britain’s pension savings into what are known as productive assets, namely things like private equity and venture capital. Right now, just 9pc of Britain’s pension assets are in investments like these, compared with 23pc in Canada and Australia.
Under Chancellor Jeremy Hunt’s Mansion House compact last summer, Phoenix has pledged to invest 5pc of its pension assets into private assets, such as early-stage venture capital.
Britain also needs to do more to attract overseas investors to the UK, says Briggs, but this will hinge on stability. “When I talk to US investors, they say, ‘I like the sound of your company, Andy, but I worry a bit about the UK. You did Brexit. And then you had all that instability with the Truss mini-Budget.’ Investors have long memories.”
‘It was all taken care of but that’s not the case anymore’