The new consensus on when we can retire

Time like an ever-flowing stream.

Bears all its sons away;

They fly forgotten as a dream

Dies at the break of day.

Well time as a stream is a good analogy and I am sitting in the Millstream at Hurley in the warmth of a beautiful English Sunday morning contemplating the impact of flexible retirement ages.

I notice that as the stream passes the hull of my boat it does not lengthen the boat. Were I to untie the boat from its moorings it would float down the river but the boat’s length would remain precisely the same.

Which is rather different than the duration of retirement. The duration of our retirement defies the basic laws of physics . While it is tethered at one end by the scheme retirement age, it stretches as the scheme membership gets older.

The Government has woken up to the fact that not only are we living longer but we are much more able to work beyond our state retirement age. Effectively they are making the stern of the retirement boat keeps an equal distance from its bow.

It is only a matter of time for sponsors to have their Damascan moment and suggest to their trustees that a flexible retirement age is equally applicable to working practices and the payment of pensions. But it’s going to take a lot of legal wrangling before we see scheme retirement ages reflect the new consensus.

As a postscript I attach a useful blog from my friend Paul Sweeting. Can we be a little more responsible about the life expectancy figures we’re quoting? “The current life expectancy is 77 for men and 81 for women” it says on the BBC website. So this means that a retirement age of 66 would mean men working for over 40 years to spend only an average of 11 in retirement, right? Wrong.

First, these life expectancies are period life expectancies, based on the current probability of survival for one year at each age – so the probability that someone currently aged 30 will survive until 31, that someone currently aged 90 will survive until 91, and so on. In other words, they do not allow for any potential improvements in mortality rates. This is incredibly pessimistic. Even the worst of the Office of National Statistics’ projections gives a cohort life expectancy – which does allow for expected improvements – of over 81 years for men and 85 years for women. The central estimate is for life expectancies from birth of over age 88 for men and 92 for women, giving each more than a decade compared with the period expectation of life.

But even this isn’t quite right. These are life expectancies from birth, whereas it is more appropriate to consider how long someone will live once they have retired. This means allowing for the fact that such people will by definition have survived until retirement but also that since they are older future improvements in life expectancy will be less relevant to them. The result is that, according to the ONS, a man currently aged 65 could expect to live for more than 21 years more, whilst a woman could expect to survive for nearly 23 more years.

That’s easy enough, isn’t it?

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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