David Fairs: How will the changing state pension age affect employers’ pension strategies?

Waiting an extra year or two before receiving a state pension might seem like a modest delay, but with more people now funding their retirement through a defined contribution pension scheme, employers need to think hard about their policies on work and retirement.

Saving longer and retiring later should make for higher pensions. But employees who want to retire earlier than state pension age, or indeed need to retire earlier because they are in a physically demanding job, will face some difficult choices. 

With the average pension pot of £30,000 currently providing an inflation-linked pension of just £20 a week, many will be financially unable to retire before the state pension age.

Employers might need to think hard about providing adequate tools and information around saving so that employees can understand their choices more clearly. With their pension becoming more distant, there might be a need for other, more flexible, forms of workplace savings so employees can choose whether to carry on working or retire earlier, using a combination of savings and pensions to finance that.

For most staff, the at-retirement choices can be pretty limited and a relaxation by the government around income drawdown would help significantly.

In the meantime, employers will need to think about whether they are happy to have an older workforce and how they need to change their employment offering to accommodate that.

If they are not happy to have an older workforce (and mind the age discrimination there), they will have to think carefully about the changes needed to facilitate earlier retirement.

For those entering the workforce, the concept of locking money away for more than 50 years may deter them from even starting to save for retirement, but they will need to be encouraged to do so, if retirement is not to become even more remote.

David Fairs is pensions partner in the people performance practice at KPMG