On the face of it, there is little incentive to be overly generous. After all, many employees will not only get more from the state but will be saving for retirement for the first time, while current pension regulation is a headache that most employers can do without.
The removal of the compulsory retirement age has wide ramifications. It means companies risk being saddled with ageing workforces. Admittedly, "old hands" offer valuable skills and experiences, but can get in the way of innovation and dynamism, leaving young and ambitious successors champing at the bit.
Legally, employers can no longer get rid of someone on age grounds. Meanwhile, at all levels of society, workers will discover that a state pension, plus modest savings, may be insufficient to enable them to choose when they retire.
I fear we face a less well-defined concept of retirement, where employees have to balance the desire to retire with the financial reality of being able to retire.
Companies will bear the brunt. Ad hoc financial inducements might entice some employees with inadequate pension pots to move off the payroll. However, that is not a sustainable formula. The onus, therefore, is on employers to make saving for retirement a tool for workforce management rather than a reward for long service.
But here’s the catch. They will either need to make generous top-ups to workers’ retirement funds or persuade employees to save significantly more than at present. Only then can employees make retirement/employment decisions that are not governed by financial hardship. The alternative, I speculate, is an ageing and potentially less productive workforce.
Other problems are brewing too. From April 2028, the age of state pension entitlement is expected to rise to 67. While working for longer may be enticing for white-collar workers, the same may not hold true for manual workers. They may feel neither fit nor able to work past, say, the age of 62.
Though the state pension, plus what they have put away through auto-enrolment into company schemes, may be adequate in the long run, they need a financial bridge that provides sufficient income until entitlement kicks in at 67. None is on the cards. Unless addressed, I predict a widening gap in the quality of retirement between top and bottom socio-economic groups.
At the other end of the scale, reduced allowances for tax-incentivised arrangements will prevent individuals in higher pay brackets from maintaining their lifestyles into retirement. Many, I fear, face a rude awakening when they realise that what they have put away will not accommodate their retirement dreams.
This is because the government-imposed “ceiling” on lifetime retirement savings ― £1.25 million from April 2014 ― has reduced significantly and is likely to be fixed in absolute terms for many years. This translates into a pension of between £45,000 and £60,000 per annum, which may be insufficient for those accustomed to £100,000+ salaries. In real terms, values will decline, eventually impacting moderate income earners. Top-up vehicles, such as corporate ISAs, offer little scope as they are capped too.
What we urgently need is a market in alternative funding mechanisms that facilitate flexible saving for retirement.
Employers, meanwhile, must deliver a menu of savings vehicles that adapt to the myriad needs of employees during their working lifetimes. It should flex with changing risk thresholds, allowing draw down during periods of economic inactivity ― say unemployment or while bringing up children.
It needs something for every age group, including18-year-olds for whom the concept of retirement is remote, as well as those approaching the end of their working lives with potentially fewer drains on financial resources.
If we don’t think creatively about the role of employers in pension provision, I foresee a future where people, at all levels of society, continue to work out of financial necessity. I envisage ageing workforces that stifle career development, innovation and creativity.
I imagine employers making huge financial payouts to get septuagenarians off their payrolls and I see manual workers, unable to bridge the financial gap to state pension entitlement age, forced into detrimental working situations simply to survive.
David Fairs is a Pensions Parner at KPMG in the UK