What does “retirement” mean?
English is a living language. New words are created and existing words change with the evolution of social trends. The meaning of “retirement”, has undergone several changes over the past few centuries, affected not just by social movements but also by shifts in other areas including demography and politics.
In Victorian times, when poorer people worked until they were physically incapable and the very rich worked only as a hobby, “retirement” generally meant withdrawing from society to experience seclusion, whether from desire or compulsion. During the second half of the 20th Century, retirement was more commonly used in reference to leaving employment and the period of life spent after this time (OED) and policies reflected this. For example, employees entitled to an employer pension were encouraged to leave work at pensionable age by rules preventing working while receiving a pension. Those without a substantial employer pension tended to leave work around their State Pension age (SPa). The trend to leave work at pensionable age or SPa was supported by legislation allowing employers to compulsorily retire employees at age 65.
The consequence of this was that many people experienced retirement as a cliff-edge, where one day they were in full-time work, and the next day they were officially “inactive”. Retirement income arrangements, such as Defined Benefit Pensions and annuities, which paid out a monthly rate (escalating or nominal) until death, helped support these “cliff-edge” transitions.
However, within the last two decades, there has been a shift in the way people retire and what the period of retirement represents. This shift has been caused by several concurrent factors.
a) Life expectancy is increasing, motivating some to work for longer in order to reduce the number of years their pension must support and increase the number of years spent contributing.
b) Increases in life expectancy are accompanied by increases in healthy life expectancy, meaning that some people may find it easier to work for longer. However, healthy life expectancy increases have not kept pace with increases in life expectancy and are still below the current SPA for some people, particularly those from lower socio-economic classes.
c) The SPA for both men and women is rising, in a staged process, to age 67 by 2028. These rises, done in the name of sustainability of the State Pension, mean that some people will be compelled to work for longer, if they cannot support themselves in retirement without their State Pension income.
d) In order to encourage longer-working the government has lifted the Default Retirement age of 65, ruled that schemes must allow people to continue working while receiving a pension, and has introduced programmes to help disabled people remain in or enter work. Reductions in the rate of working-age benefits compared to pension benefits may also act as a motivation to stay in work longer.
These changes have coincided with an increase in the level of flexibility available to employees, for example, part-time working, working from home, accessibility and adaptions. The drive for flexibility has come not just from Government but also from employers who are adapting to a more diverse workforce including older people, mothers, carers and disabled people.
As the idea that “retirement” occurs at a single, pre-determined age is changing, the way in which people retire is also changing. More people have recognised that flexible or longer working suits their needs and lifestyle.
• A cliff-edge retirement can result in social, psychological and economic difficulties, and a gradual decrease in hours can make the transition easier.
• Those who do not feel they have saved enough in a pension often wish to continue working full time after they have reached their pension age.
• People struggling with age-related health or mobility problems may find that flexible working is easier than full-time traditional work.
What does a change in the meaning of retirement mean for employers and industry?
For many employers an influx of older people into the workforce, alongside other people with diverse needs, means that they need to continue embracing flexibility and recognising that a diverse workforce can be an asset for an organisation, offering an array of skills and experience.
Those retiring flexibly may need to top up earnings with pension income that increases once they leave work entirely. Consumption at older ages indicates that even when pensioners are not working, income needs vary several times during retirement due to changes in health and mobility. The need for a fluctuating level of income throughout retirement does not necessarily work well with traditional retirement income products, such as annuities. Drawdown can be a more useful way of providing an income for some in retirement, though drawdown customers face the risk of running out of savings before their death, unlike annuitants.
Retirement income products in future will need to be able to provide for the needs of a diverse workforce, some who will wish to work until older ages, perhaps part-time and supplemented by a pensions. This could affect both investment needs in the accrual phase and the amount and frequency of withdrawals people might wish to take during retirement. Products will also need to be designed to help people manage times of greater need that may unexpected, without jeopardising the overall level of savings.
As retirement evolves with changes in demographics and policy, employers and industry will both need to keep abreast of behavioural trends to ensure that people are given the best opportunities to “retire” in a manner that suits their individual needs.