by Dr. Ros Altmann
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Part-time work takes over so retirement is a process, not an event
It is a brave minister who admits unpalatable truths. This week Steve Webb, the Minister for Pensions, had the courage to say that the golden days of pensions are over, replaced by a system in which people paying in money have "absolutely no idea" what they will receive in return. This from a minister who is bringing in the automatic enrolment of millions of workers into employer pension schemes.
Such honesty is welcome and long overdue. We have reached a watershed moment in the financing of what used to be called old age. As we wake up to the reality of providing income for later life, we need a fundamental rethink about pensions and retirement.
The rethinking actually stems from wonderful news. Millions more people now live longer and healthier lives, thanks to tremendous advances in healthcare and medical research. Improved working practices and fewer heavy manual jobs also mean that people can keep working far longer.
When the current concepts of pensions and retirement were introduced, people in their sixties were classed as old. Now many are still fit and healthy into their seventies or beyond. We cannot afford to let them leave the labour force.
It is simply not sustainable to expect that private pension savings - whether organised by employers or individuals - can guarantee a good income for an ever-increasing length of time. The traditional view that underpinned private pensions was that in the long term, stock market and investment returns would provide. The magic of the markets would always deliver, however long people lived, however much salaries and prices rose and however much regulatory burdens increased or interest rates fell, undermining annuity rates.
Instead, we are heading for economic misery all round. It is time to adjust our ideas about retirement.
Instead of expecting to live our lives in three stages - education, full-time work and full-time retirement - there is a fourth phase of life to be grasped. Let's call these the bonus years. This is when part-time work takes over from full-time, turning retirement into a process rather than an event. It's a period of life that might run throughout our sixties and well into our seventies, when we adapt our working hours according to our health, financial needs and aspirations.
I am convinced it will happen as the current generation of sixty something baby-boomers realise that they have potentially 30 more years of life ahead and not enough money to live on.
Our image of retirement has been hijacked by the tourist industry, showing pictures of happy, wealthy pensioners living a life of golf and cruises. Yes, there are pensioners who took early retirement on guaranteed good incomes for whom this is a reality. But that was a brief aberration that lulled too many people into a false sense of security and engendered unrealistic expectations.
Many of those retiring now do not have large pensions. Half of pensioners have incomes below £10,000 a year. So as well as rethinking our definition of retirement we also need to rethink what we call pensions.
The word pension currently describes two very different things. First, pensions are social welfare payments to support those too old to work. Beveridge dealt with this via national insurance contributions. But a pension also describes a special type of long-term saving. Using the same word for two different concepts has caused muddled thinking.
Employer final-salary schemes have ended up providing a bit of both, as successive UK governments have consistently offloaded social welfare responsibility away from the State and on to these schemes. Providing partners' pensions and protecting early leavers would not normally be considered an employer's role. But actuarial assumptions suggested that final-salary schemes could cope with such massive demands, further fuelling unrealistic expectations.
We have grown up with the illusion that, however much the parameters change, somehow pensions can keep paying out. But equities and other risk assets cannot possibly keep up with pension demands. With most savings schemes, we recognise this reality, but when it comes to pensions, we bury our heads in the sand. Such wishful thinking cannot last. The time has come to abolish the word "pension" from anything other than state payments, separating the idea of social welfare - a state function - from the concept of long-term savings for later life. Those savings may perform poorly for certain periods of time or some of the parameters, such as interest rates, may change, so those plans need to be flexible.
In 20 years' time, someone turning 65 should expect to be asked how much work they are doing now and how much they plan to do over the next ten years - not when they will stop. I am convinced that this change will come, because it has to. If we do not have a social revolution among the baby-boomers, we are heading for inevitable long-term economic decline.
We must start being honest with ourselves about our futures. The Government's removal of the default retirement age was a good first step in practical and philosophical terms.
So too is the plan to introduce a flat-rate state pension, providing just a social welfare minimum - with flexibility about the age at which it will start. That stops people from growing up with a fixed expectation about the age at which they will stop working altogether. Such new thinking might also usefully be applied to solving the looming crisis in social care funding.
It will then be clear that if we want to receive more than the £140 per week minimum that the State offers, we will need money from somewhere. If we haven't saved enough to provide more, we will have to keep on working, which many people will find rewarding.
Rethinking retirement and being realistic about pensions is no longer an issue for old people. Nor should it lead to a doctrine of despair. If we embrace our bonus years, we can enrich later life in financial and non-financial terms.
Ros Altmann is director-general of Saga