Understanding the Past, Building the Future: Retirement

As we continue to celebrate our 100th anniversary, we went to our consulting practices and asked the leaders three questions:

  • How have things changed in their fields in the past 100 years?
  • What are the biggest challenges they – and their clients – are about to face?
  • What’s the most exciting thing they speculate is coming along?

This post looks at those questions through the eyes of our Wealth consulting practice leaders in Canada, the U.S., and the U.K.. Here’s what they told us.

North America

(By Craig Greenwald and Faisal Siddiqi)

The changing face of “retirement”

The concept of “retirement” has changed significantly over the last 100 years. In the early 1900’s most people worked until they were physically unable to work in order to sustain themselves, and then relied on their families for support in old age until they died.  Life expectancy was a lot shorter at around 50 years and retirement was a brief period for most people until they died.

The Ontario Liberals had always said that if the federal government would agree to expanding the CPP then the ORPP would not be needed.
“I would say the biggest challenge facing retirement planning is figuring out exactly what you’ll live off of in retirement.” Faisal Siddiqi, Wealth Practice Leader, Canada

From WWI to WWII, governments took steps to reduce poverty in old age and provide a small amount of social security benefits to help people live who had worked. Life expectancy increased but most people worked as long as they could.

By the 1970’s many companies started to provide employer-sponsored pensions to supplement government pensions. This helped employees leave companies at earlier ages and allowed younger employees to join the workforce.  Retirement as a concept finally came to be. It was a long enough period of time that people retired between ages 60 to 65 and enjoyed some time to see families, travel, relax, and do other activities.

The period from 1970 to 2000 might be considered a “golden era” for retirement as a concept.  Many people who worked during their lifetimes received full government pensions, covered health care in old age, full employer-paid defined benefit pensions, and the rise of two-income retiree households.  Many people retired in their 50s and lived to their early 80s, enjoyed a long period of secure monthly payments, travelled, spent time with families, joined clubs, did volunteer work, and so on.

In the past 15 years, retirement as a concept became clear in people’s minds – but having what their parents had become difficult.  There were changing demographics (many single families, many individuals with sporadic work histories, etc.), employer-sponsored plans changed from defined benefit to defined contribution, post-retirement health coverage disappeared for most people, and people started working many jobs during their working lifetimes. Wanting more out life, working after retirement from your primary career took off as a concept.  Phased retirement was introduced, and there was a shift from paternal coverage to self-management of retirement.

Volatile investment markets and decreasing interest rates have created undesirable financial impacts for plan sponsors, which has led to the closing of many pension plans sponsored by corporate employers.  This has led to a growing concern about retirement readiness.

Complexities abound

I would say the biggest challenge facing retirement planning is figuring out exactly what you’ll live off of in retirement, because the sources of retirement income are so varied and so complex.

People will receive multiple government pensions – in Canada, there is the Canada Pension Plan (based on employment), the Old Age Security pension (universal), and now provincial workplace pensions as they start to develop.

Other sources are pensions from multiple employers from different job, with the likely mix of both DB and DC pensions. The complexities come from trying to assess how to receive your DC pensions, manage your own personal retirement savings, work during your retirement years, downsize your house to possibly a smaller home in a less expensive locale, and manage multiple insurance policies that might be used to provide health, life, and retirement income protection.  All in all, it will be a complex world and advice from experts will be needed.

In the US, the biggest challenge is dealing with the increased financial burden of preparing for retirement given the drop in employer provided benefits.  This has led to uncertainty about the amount needed to save for retirement.  Also, the shift to defined contribution plans has added investment risk to the uncertainty of achieving necessary resources.  In addition, there is concern about the future of Social Security.

"the most critical development likely will continue to be a focus on retirement readiness and overall financial wellness." Craig Greenwald,
“the most critical development likely will continue to be a focus on retirement readiness and overall financial wellness.” Craig Greenwald, Wealth Global Practice Leader

Pensions for sale?

Workplace pensions are going to evolve like the personal computer industry has evolved.

The products (pension plans) are going to become more complex, but easier to understand.  Simplification of pension communication will improve understanding 10-fold. Just as we don’t think of the nuts and bolts of a computer but rather how to use it, the way we think of retirement income won’t be as it was 15 or 20 years ago, but will focus on how it can be used. We might have multiple sources of retirement but there will be a way to package it so that people can just get it.

Workplace pensions will be bought and sold in the future. “Oh, I didn’t save enough.  No problem, I will just go to the pension market and get a DB pension that works for me.” Or “I want to sell my DB or DC pension. Anybody interested in buying mine for a good price?”

These are possible (and exciting) outcomes, but not in the near future from my personal view.   The term “workplace pensions”  is becoming less relevant.  At the very least, I expect people will become better educated about retirement needs and the forced focus on individual responsibility will lead to better outcomes.  But retirement income security will probably get worse before it gets better.  As a result, the most critical development likely will continue to be a focus on retirement readiness and overall financial wellness.

United Kingdom

(By Sue Curley)

Only for those of ‘good character’

The concept of retirement has changed immeasurably in the last 100 years.

In Britain, the Old Age Pensions Act 1908 first introduced the concept of a State Pension. Prior to that individuals had to rely on the generosity of their employers or self-fund their income in old age.

The Act provided for a non-contributory old age pension for people over the age of 70. It was enacted in January 1909 and paid a weekly pension of 5s a week (7s 6d for married couples) to half a million who were eligible. The level of benefit was deliberately set low to encourage workers to also make their own provision for retirement. In order to be eligible, they had to be earning less than £31.10s per year, and had to pass a ‘character test’; only those with a ‘good character’ could receive the pensions. You also had to have been a UK resident for at least 20 years to be eligible and people who hadn’t worked their whole life were also not eligible.

"The suitability of a savings vehicle for an individual will very much depend on their circumstances." Sue Curley, Head of DC Wealth, London
“The suitability of a savings vehicle for an individual will very much depend on their circumstances.” Sue Curley, Head of DC Wealth, London

Also excluded were those in receipt of poor relief, ‘lunatics’ in asylums, persons sentenced to prison for ten years after their release, persons convicted of drunkenness (at the discretion of the court), and any person who was guilty of ‘habitual failure to work’ according to one’s ability

The current State Pension

The current full UK State Pension is £155.65 per week. The amount is calculated based on National Insurance contributions.

10 qualifying years of National Insurance contributions are required to get any State Pension.

Three major changes have occurred since the introduction of the first state pension in 1908;

  • The introduction of the Welfare State which provided a universal income to all in retirement, either through the State Pension, or means tested state benefits
  • The introduction of employer sponsored pension arrangements to attract and retain the best employees
  • A significant increase in life expectancy

Life expectancy challenges

By 1900 in Britain it was about 47 for a man and about 50 for a woman (this figure is skewed by the rate of infant mortality). By the early 1930s life expectancy for a man at birth was about 60. By the 1950s it had risen to about 65. Things improved more slowly in the late 20th century but by 1971 life expectancy for a man in Britain was 68. For a woman it was 72. In 2015 life expectancy was 79 for a man in the Britain and 83 for a woman. Currently it is assumed that life expectancy is 84 for a man and 85 for a woman, at age 65.

Today’s employees now expect to live much longer than their ancestors and expect to live comfortably in retirement. In today’s environment our job is to devise solutions and educational programmes so that employees are able to reasonably predict their retirement income and plan their lives accordingly.

At present this is tending to mean that individuals underestimate the level of income that they require when they stop work, and is leading to continued working potentially into their 70’s.

Managing expectations

The biggest challenge facing retirement planning over the next 20 years is managing savers’ expectations with regard to future income and when they will be able to stop working.

The solution to this is the introduction of financial education programmes in schools so that the concept of financial management is learned from an early age. It is no longer appropriate for society to take ‘pot luck’ with our children, in the hope that their parents will have provided a grounding in financial management and savings, or that they will properly grasp the concept once they leave home.

To achieve this objective, we will need the backing of the UK government and financial institutions.

Financial education is not however restricted to those of school age. As advisers we have a responsibility to devise programmes for employees at all levels to educate and assist in financial planning.

These programmes must be easy to use and engaging. There are such programmes in existence; however statistics show us that employee usage is low. We must work to find a solution to increase engagement between employees and their savings providers. A good place to start is within educational institutions, but that still leaves the greater part of the population for whom financial education is only undertaken if it is something which they find to be of interest.

Replacing pensions with savings

The most exciting thing that I see developing in workplace pensions in the coming years is the removal of the concept of pension as the means of retirement income and the replacement of pension with the concept of savings.

Since April 2016, with the introduction of greater flexibilities in UK pensions and the introduction of the Lifetime Savings Account from April 2017, we can no longer think about pensions as the workplace savings vehicle.

In addition the reduced UK Annual Allowance means that those with pension savings worth in excess of £1m will not wish to continue payments into a pension arrangement.

Employers now need to review their benefits strategy so that they will be able to offer a choice of savings vehicles to their employees. The suitability of a savings vehicle for an individual will very much depend on their circumstances. Today we are looking at the individual’s needs rather than implementing a programme which is ‘one size fits all’.

Future benefits strategies should include all aspects of employee benefit arrangements and savings plans to include:

  • Pension
  • Savings accounts
  • Flexible benefits
  • Access to share plans
  • Heath benefits
  • Financial and lifestyle educational programmes

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