Life expectancy and retirement planning…

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Yesterday the national media provided widespread coverage of the the latest statistics regarding UK life expectancy.

The main findings from the Marmot Indicators Briefing in this respect were as follows:

  • Improvements in life expectancy at birth have slowed since 2010 to a one year increase every 10 years for women, and every six years for men.
  • Similarly increases in life expectancy at age 65 have slowed to a one year increase every 16 years for women, and every nine years for men.

There has been much media speculation as to why this slow-down has taken place (when some other developed economies are continuing to improve life expectancy), yet that debate is not one for this particular post.  The issue we want to look at here is what impact this news may have on retirement planning.

And to develop this theme we firstly need to look at some other findings from the report, and in particular the life expectancy age.  These figures are of course not uniform across the nation, and the report highlights the inequalities in life expectancy between different geographical areas.  For instance life expectancy for men varied from 74 in Blackpool to 83 in Kensington & Chelsea.  Among women it varied from 79 in Manchester to 86 in Kensington & Chelsea.

Yet even the lower figures are significantly higher than the current State Pension Age (SPA) – or indeed the intended future SPA of age 68.  This is an important point.

The state old age pension was first introduced over a century ago.  When first established the SPA was set at age 70, yet average life expectancy at the time was probably only around age 50.  In effect the state pension was originally intended as a safety net only for those few that reached the rather high starting age for retirement income payments.  Or, put simply, it was an insurance against something that only might happen.

Over the years this situation has changed significantly.  For most people the state pension has now become something more akin to an assurance, with the vast majority expecting to receive at least some state pension payments.

Of course this does not only apply to state pensions.  Company sponsored schemes are also ever more likely to pay out a retirement income.  Self-evidently this is good news.

Yet the previously rampant increases in life expectancy have also posed problems for both state and private pension provision; the key challenge being how to fund ever-longer retirements.  Put simply pension schemes have been chasing a moving target for many years, and that has proved more than tricky when each extra year of retirement needs to be funded with adequate pension income.

So whilst the slow-down in life expectancy is generally and rightly a concern, it should be noted that for pension planning purposes this news may present some welcome respite to schemes and savers seeking to bridge the retirement income issue.

It remains to be seen if this is just a blip, or a genuine long-term slowing in life expectancy.  It will also be interesting to see when these changes will be fully factored into the actuarial assumptions used by pension schemes and/or annuity providers.

Finally, and not least, it is worth mentioning that this remains a slow-down rather than a cessation in increases to life expectancy, so the problem of funding for a longer retirement has not gone away, only lessened.

All the above only serves to highlight the importance for savers – and indeed employers – to fully understand the dynamics behind retirement savings to ensure a good outcome in each and every case.  For more information on our services in this area please speak to your usual Jelf Consultant in the first instance.

Best regards

Steve

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About the author

Steve Herbert is an award-winning thought leader on Pensions and Employee Benefit issues. His principal aim is better communicating the value and usage of employee benefits to employers. This he has achieved through many (highly successful) seminar series over the last decade, and his regular and widely read blog posts on the subject.
He also acts as a judge in HR and Employee Benefits industry awards, article writer, and product innovator. Steve is a regular contributor to DWP forums and compulsive responder to formal Government Consultations on pension and employee benefit issues. He is occasionally accused of making employee benefits interesting.