It doesn’t seem so long ago that economists and sociologists were promising us a brave new world of leisure and material well-being based on three-day working weeks and retirement at 50, all thanks to the benefits of new technology.
Yet, at the recent Labour Party conference, Gordon Brown stated with great emphasis that “there are no plans to extend the retirement age to 70” – from which we can be reasonably certain that he does plan to extend it to either 69 or 71. This is not simply journalistic cynicism. Within minutes, one of the Chancellor’s apparatchiks was briefing Radio 4 to the effect that “while there are no plans to extend the retirement age to 70, it clearly made sense for ‘most people’ to delay retirement in order to fund their pensions”.
And, to be fair, there is a good deal of sense in this. The looming pensions crisis can be tackled in a number of ways – none of them especially attractive to those of us who’d rather spend our hard-earned cash on foreign holidays and dining out regularly – but none are remotely as effective as later retirement. The impact of five more years contributing to the pension pot and five years less drawing the proceeds has been compared favourably with 5% pa extra growth in pension funds over 20 years under existing arrangements.
So what are the implications?
Well, as always, there are macro issues and micro issues. Starting with the big picture, this ostensibly modest extension of working life by a few years would in fact mean a powerful and dynamic shift in the overall profile of financial consumers and, by extension, the opportunities they represent for product providers and advisers. Long-established presumptions that the financial services market (for those in work) is divided fairly evenly between young adults, mid-life families and the pre-retired will have to be seriously reconsidered. The demographic shift is already adding significant weighting to the pre-retired segment; include another five years of population and this will unquestionably become the dominant target group, not only in terms of numbers but, more particularly, in terms of investable assets.
As we have noted before in Invisible Brand, the financial services industry has been slow to adopt any sophisticated level of segregated marketing activity, but here is one segment it simply cannot afford to ignore. Not least because, to be effective, marketers will need to sub-segment this massive group into those for whom late retirement is a financial necessity; those who can afford to retire when they choose; and those (perhaps the largest sub group) who are somewhere in between.
When it comes to communications, financial marketers and their agencies will also need to throw away their stereotypes and take a serious look at the lifestyles and attitudes of the ‘Baby Boomers’ who constitute the majority of this group. Harley Davidsons, gym membership and marathon-running are just part of the picture of a generation reluctant to grow old gracefully; research shows that 50% of people in their fifties want cannabis decriminalised.
Nothing is straightforward
A later retirement age has implications not only for those who are (or who thought they were) approaching retirement, but also for those starting out in adult life. What were already very long time horizons for someone in their early twenties suddenly start to spin out into infinity. Yes, the 30 year, or even 40 year mortgage becomes a possibility – and perhaps even a necessity with high property prices – and, yes, that regular savings scheme you start today has greater potential to amass some real wealth for you when you need it and, yes, by starting a pension at this time you really stand a very good chance of adequately funding your retirement.
On the other hand, consider this: young adults are not taking more responsibility earlier, they are taking less. 70% of people born before the late 60s were financially independent and married with children by the age of 30. Today, the figure is less than 30%. The 30 year old still living at home may be every parent’s nightmare, yet it is increasingly a reality. Instead of taking advantage of an increased financial planning timescale, ‘Generation i’ can relax in the knowledge that it’s all so far away, it really doesn’t matter.
Meantime their parents’ generation – the ones who have blown most of our North Sea oil, lived high on the hog and would prefer, if at all possible, to trade their property down to fund their retirement – are having to face up to the fact that their children’s generation is saddled with education debt; with the obligation to support a burgeoning retired population through higher taxation; and with a property ladder so far off the ground they can’t hope to reach the first rung. What will they do?
The signs are that they – or at least those who can afford to do so – will accelerate the ‘conveyor belt shift’ of financial activity still further up the age range by helping their children purchase homes, paying off their debts, and providing them with other forms of financial support.
So one possible scenario, at least, is that a later retirement age will not extend the typical period of active engagement with financial services, it will simply postpone the start.
Where do we go from here?
If it’s taken this article a little while to get round to the micro, it’s because some of the points are fairly evident. The pensions providers should benefit, of course, but they’ll also need to keep in mind that more mature contributors will be more experienced, canny and demanding. They’ll want to take full advantage of the provisions of ‘A-Day’ from 2006 which, among other things will allow them to purchase residential property as a SIPP investment – women, in particular, according to recent research. They’ll also want more flexibility and it must be assumed they’ll be more promiscuous as customers unless properly looked after.
Life companies will need to get used to the idea of covering older age groups for longer terms; and providing younger age groups with term cover for very long mortgages. PHI and PMI providers will also need to consider the implications of covering employee groups with a higher age profile.
Enforced later retirement presents a particular opportunity for investment houses, at least in the current climate, since the widespread distrust of pensions providers in the wake of Equitable Life et al inclines financial consumers to keep their assets in their own hands, tax relief or no tax relief. Imaginative savings products for the pre-retired as a complement to, or in lieu of, conventional pensions are likely to have strong appeal. The long term outlook for ISAs may be uncertain but, currently, products such as the recent spate of Channel Islands-based property trusts, with an ISA wrapper, offer a perfect example of alternative retirement planning tools.
It may seem a paradox that those contemplating retirement are likely to have parallel concerns about earning enough to live on, yet seeing the importance of passing money onto their children to get them started. When expressed as ‘asset rich, income poor’ this starts to make more obvious sense and, perhaps, serves to point us in the direction of new (or enhanced) opportunities for providers, and especially for advisers in equity release, wealth transfer, income generation and the mitigation of Inheritance Tax.
Sobering thoughts
This short article can do little more than sketch out a few tentative and even speculative scenarios but there can be little doubt that the pensions ‘issue’, ‘shortfall’ or ‘crisis’ – whichever you prefer to call it – and the associated demographic trends will resonate throughout the financial services industry (that is, way beyond the pensions providers) for some time to come. Any financial services marketer worth his or her salt will want to start thinking about the implications and opportunities sooner rather than later.
In the meantime, the really sobering thought is this: if few employers are keen to find jobs for the over 50s, what chance for the over 65s?
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