Pensions and Lifetime Savings Association – Written evidence PAS0034

INQUIRY: PREPARING FOR AN AGEING SOCIETY

 

The Pensions and Lifetime Savings Association (PLSA) is the voice of workplace pensions and savings. We welcome the opportunity to respond to the Economic Affairs Committee’s inquiry into preparing for an ageing society. We represent pension schemes that together provide a retirement income to more than 30 million savers in the UK and invest more than £1.3 trillion in the UK and abroad. Our members also include asset managers, consultants, law firms, fintechs, and others who play an influential role in people’s financial futures.

We aim to help everyone achieve a better income in retirement.

 

An ageing society presents a number of challenges to the UK pensions system. There are questions about the sustainability of the Triple Lock mechanism and the future of the State Pension Age. Automatic Enrolment contributions are still not high enough to ensure that most people reach even the minimum Retirement Living Standard, which is £14,400 for a single person and £22,400 for a couple1. To overcome some of these challenges, the PLSA recommends that:

 


1 The Retirement Living Standards are a set of standards developed by the PLSA and Loughborough University, which help to show what life in retirement looks like at three different levels, and what a range of common goods and services would cost for each level. The figures shown are the amounts of expenditure required to achieve a given living standard: Home - PLSA - Retirement Living Standards


 


 

What changes to the workforce are needed to support an ageing population? How does the productivity of older workers compare to those who are younger? How might the productivity of older workers be improved?

Many people continue to work later in life - beyond their retirement age - either through choice or necessity. For those who have not saved a sufficient amount into a pension and do not possess enough property wealth to make up the difference, working in later life could enable them to achieve an adequate standard of living in retirement. Even for those with significant savings, rising longevity may require them to stay in the workforce for longer if they want to maintain their standard of living in retirement. Increasing life expectancies means that many people will have more years of healthy living beyond the traditional retirement age; from 2021-2023 life expectancy for people in the UK at age 65 years was 18.5 years for males and 21.0 years for females2.

The most recent data (November 2024 – January 2025) shows that employment rates for older people are lower than at traditional working ages; the employment level for people aged 35-49 was 85.8%, compared to 71.5% for those aged 50-64, and just 12.3% for those aged 65 and over3. While this is due to many older people taking the free choice to retire, other drivers can essentially force some people into retirement. These factors present barriers to


2 National life tables – life expectancy in the UK - Office for National Statistics

3 A05 SA: Employment, unemployment and economic inactivity by age group (seasonally adjusted) - Office for National Statistics


 

some older people remaining in the workforce. Firstly, declining health is known to be a significant factor cited by individuals aged 50-64 for leaving the labour market early. ‘Involuntary’ labour market exit becomes increasingly likely as self-reported health declines. Age UK report that 54.5% of people in their 50s have no diagnosed long-term condition, this falls to 47.5% of people in their 60s, to 40.6% of people in their 70s, and to 31.5% of people aged 80+. The number of people with a disability is also shown to increase with age, where 27.4% of people in their 50’s are likely to have a disability. This almost doubles to 51.7% for people 80+4.

Next, as the UK population ages a greater proportion of working age people will provide informal care to friends and relatives. The likelihood of being a carer also increases significantly with age. According to the England and Wales Census 2021, the biggest proportion of people caring in England and Wales are from the 55-59 age group. The Census also found that the older age groups provide the highest hours of unpaid care per week. For women, it was those aged between 75 and 79 who were most likely to provide 50 hours or more of care. For men, it was those aged between 85-89 who were most likely to provide 50 hours or more of care5.

A third major factor is that people aged 50 years and over are less likely than younger age groups to possess formal qualifications, which can reduce


4 State of Health and Care of Older People in England 2024

5 Key facts and figures | Carers UK


 

employment prospects as they are often used by employers to judge skill levels. The prevalence of job-related training also declines with age – therefore remaining the question of whether older workers will be able to adapt to the more frequent skills changes that are likely to be required from workers due to technological innovation, such as developments in AI.

The old-age economic dependency ratio, which is the number of people aged 65 and over as a percentage of the total labour force, is predicted to increase in many parts of the world over the coming years. By 2030, the number of people aged 65 and over in the region of Northern, Southern and Western Europe is predicted to be equivalent of 55% of its labour force, compared to 43% in 20176. At the same time, due to expected developments in and uptake of AI, the process of upskilling is likely to become much more of a regular need for most workers. The average lifespan of a tech skill, such as software skills, is roughly 18 months according to one recent estimate. Almost all workers, across all industries, occupations and age-groups, will need to increase their understanding, digital awareness, and ability to adapt to skills changes in order to function successfully7. However, older workers’ participation in both formal education and on-the-job training has been found to be significantly lower than that of younger workers, largely because employers are more reluctant to

 


6 Kühn, S., Milasi, S. and Yoon, S., Population ageing and future labour market challenges. World Employ Soc Outlook, January 2018, p.48.

7 The Potential Impact of Artificial Intelligence on UK Employment and the Demand for Skills, PwC, Department for Business, Energy and Industrial Strategy, August 2021, p.63.


 

incur training costs for workers who are expected to remain with their organisations for shorter periods of time. Older workers may therefore find it harder to adapt to skills changes and find themselves more at risk of job losses if they are unable to do so. An increasingly ageing workforce also implies that the stock of available skills will become outdated in the face of continuing innovation, potentially harming productivity growth (in the economic sense).

The PLSA believes that older people should be supported to stay in the workforce for longer, should they wish to do so, in order to ensure that they have sufficient savings to achieve their desired income level. In our report Hitting the Target, we recommend that for those who need or choose to stay in employment, the Government, employers and the savings industry should attempt to support older workers to remain in the workforce. The Chartered Institute of Personnel and Development (CIPD) has proposed a series of best practice principles that employers could adopt and implement. If employers are to create an age-diverse workforce, then they should seek to:

1.    Support employee health and well-being;

 

2.    Design more creative and cohesive provision for people with caring responsibilities;

3.    Improve flexibility in working time;

 

4.    Provide training and development support;

 

5.    Manage retirement actively;


 

6.    Build an inclusive and age-diverse culture; and

 

7.    Tailor solutions to suit individual need.

 

There is widespread consensus that flexible working arrangements are among the most important changes that can be introduced in order to help older workers stay in the workforce. Where possible, employers should consider implementing greater flexibility for all workers, but older employees in particular.

What incentives regarding workforce participation by older individuals are created by the various existing tax and pension arrangements?

What policies should the Government pursue to encourage and support people to remain in the workforce later in life? How can the recruitment and retention of older people be supported?

There are a number of policies and incentives already in place that may encourage people to stay in the workforce for longer:


 

As covered in our answer to question three, the PLSA believes that the Government, employers and the savings industry should attempt to support older workers to remain in the workforce via a number of policies, in particular those that would allow more flexibility of working hours and provision for training and development for older workers.


 

We would also note that research by the University of Bath has shown that the design of the benefits system, and in particular Universal Credit and Pension Credit, can create disincentives for people to return to work. As claimants earn more, they may lose entitlements to additional support such as council tax reductions or free school meals, thereby creating a ‘cliff edge’, where a small increase in earnings leads to a disproportionate loss of benefits. The research recommends that fairer and more consistent methods are needed for withdrawing support as earnings rise to remove the disincentive effects of cliff edges on work decisions8.

 

 

 

What policies aimed at younger people are necessary given the broader ageing of the UK? How might the course of working lives have to change as the UK transitions to an older population?

Automatic Enrolment

 

As the pensions market shifts from Defined Benefit to Defined Contribution saving, fewer and fewer savers will have a guaranteed income in retirement. While Automatic Enrolment has been hugely successful in getting more savers with DC pensions to start contributing, it is clear that the level of AE contributions is still not sufficient to ensure that all people are saving enough to achieve an acceptable standard of living in retirement. PLSA research has


8 https://blogs.bath.ac.uk/iprblog/2024/09/30/universal-credit-cliff-edges-and-precipitous-inclines-how- earning-more-can-leave-low-income-workers-financially-worse-off/?utm_source=chatgpt.com


 

shown that only 35% of DC savers with no DB entitlement would reach their Pensions Commission Replacement Rate. And of the whole DC saving population, nearly 30%, or 5 million households, are not on track to reach even the minimum Retirement Living Standard, which is £14,400 for a single person and £22,400 for a couple.

We argue that over the course of the next decade, AE contributions should rise gradually (for example, by 0.5% a year) from 8% to 12%. While employees should only be required to put in by default a total of 1% extra, we believe employers should put a total of 3% extra in, with the result that by the early 2030s each will be paying 6%, totalling 12%. Contributions at 12% may be too much for persistently low earners, however, and we are conducting research to consider whether some flexibility should be built into the system to account for that. But for most savers, saving at 8% is not enough.

We also argue that the scope of AE is excluding too many, particularly lower earners, who are disproportionately also women, people with different working patterns (such as part time workers and multiple job holders) and ethnic minorities. The Government should give additional help to under pensioned groups such as these. We believe that the scope of AE should be broadened to include gig-economy workers, and that the Government may wish to explore further support for younger savers and those who earn below the current

£10,000 threshold (though a bill was passed in 2023 to abolish the Lower


 

Earnings Limit for contributions and reducing the age for being automatically enrolled to 18 years old, this has yet to come into effect).

The State Pension

 

The future of the State Pension is uncertain, with some predictions that it cannot remain fiscally sustainable. Research has suggested that the UK’s State Pension Age may need to reach age 70+ by as early as 2040 to maintain the current old age economic dependency ratio9 (which is the percentage of people ages 65 and over relative to the working adult population).

The PLSA is strongly of the view the State Pension should support people to achieve an adequate and dignified income in retirement. To ensure that it remains affordable, adequate and fair, the Government must maintain the value of the State Pension to protect against pensioner poverty and cover all basic needs. It plays an essential role in the pension provision of most workers so its current value should be maintained and, when affordable, increased in line with the Triple Lock mechanism. The Triple Lock should be maintained in the short and medium term, shifting to a new pensioner poverty prevention index in the long-term. This will help the Government to better manage the volatility of costs associated with the mechanism for increasing the State Pension level, whilst also ensuring the State Pension covers the basic needs for pensioners.


9 The UK and other ageing populations will have to increase their state pension age to 71 by 2050 to maintain the number of workers per retiree - ILCUK


 

Any increases to the State Pension Age should not take place unless there is a corresponding increase in the years of healthy life across the population. If the State Pension Age is to increase, the Government should provide at least 15 years notice to give people time to make plans to cope with this change in financial support.

Are there any issues relating to intergenerational fairness raised by a shift towards an older population? Are there policies which might improve the efficiency of the transfer of assets between generations?

As healthy life expectancy increases, there is the perception that younger generations might not receive the State Pension, despite having started to pay tax and National Insurance contributions for a number of years, due to changes in the worker dependency ratio (more pensioners being supported by a proportionally smaller working age population) and the State Pension therefore becoming unaffordable for the Government. And if younger generations do receive it, the perception is that they will have to work for longer to be eligible. Research has shown that just 46% of individuals believe that the State Pension will exist by the time those who are currently in their 20s come to retire. Those who believed it will still exist also thought that the State Pension Age would rise, giving an average age of 71. 31% of individuals believed that the State Pension will not exist at all10.

 

 


10 Half of savers believe state pension won’t exist for young people - FTAdviser


 

If all generations can be sure of having a fixed proportion of their expected adult life receiving State Pension and the pension level is constant in real terms, and the age dependency ratio also remains constant, this will help ensure that costs are shared fairly between generations. We believe that the State Pension should be set at a level which prevents people from falling into poverty, and any increases to the State Pension Age should not take place unless there is a corresponding increase in the years of healthy life across the population. If the State Pension Age is to increase, the Government should provide at least 15 years notice to give people time to make plans to cope with this change in financial support.

In addition to questions about the future of the State Pension, there are wider economic factors that are contributing to intergenerational unfairness.

According to the ONS, real average weekly pay in February 2025 was just 2.5% higher than in February 200811. A lack of meaningful pay growth is translating to lower standards of living in retirement, as people are unable to afford higher contributions, and also means that key milestones in life, such as having children and purchasing a home, are happening later. These are significant issues of fairness: younger generations are increasingly unable to afford the standard of living during their working lives and retirement that their parents and grandparents enjoyed.

 

 


11 EARN01: Average weekly earnings - Office for National Statistics


 

One factor contributing to this disparity is the market shift from DB to DC pension provision. In the past, for those that had a pension provided by their employer, DB was the norm and guaranteed savers an income in retirement. Younger generations are now much more likely to be saving into a DC pension, which may put them at a disadvantage compared to older generations who had access to (and currently still enjoy the benefits from) a DB pension, as the former does not guarantee an income in retirement. The value of DB pension wealth is typically significantly greater than DC; according to the ONS, the median DC pension wealth (per individual) is valued at £7,000, while the median DB pension wealth is £56,20012. While this is partly due to older savers having had more time to accrue savings, it is also likely due to the economic disparity between generations as described: younger savers find it more difficult to afford pension contributions, and Government must seriously consider the affordability of higher contributions for working age households.

The PLSA supports the ongoing provision of DB, recognising that DB schemes remain of critical importance in the provision of pensions in the UK, including finding that people with access to a DB pension are more likely to be on track for an adequate income in retirement13. We also believe that Collective Defined Contribution (CDC) pension provision is an area worth exploring further, as it

 

 

 


12 Pension wealth: wealth in Great Britain - Office for National Statistics

13 Protecting pension savers – five years on from the pension freedoms: Saving for later life”, Work and Pensions Committee (September 2022).


 

facilitates greater risk sharing and in theory provides greater security in retirement for individual savers.

Wealth has traditionally been transferred between generations via inheritance of property. However, some retirees choose to use equity release products to increase their income in retirement, which means they are unable to pass property wealth on to their children and grandchildren. The PLSA recommends that providers should seek to make equity release products more flexible, so that payments can be drawn in smaller regular sums and make it easier to transfer loans to other properties.

Summary

 

The PLSA argues that the Government, employers, and the pensions industry should support flexible working and ongoing training for older workers to help them stay employed for longer. Automatic Enrolment should be expanded and contribution rates increased to help younger people save enough for retirement. The Triple Lock should be maintained in the short and medium term, with it shifting to a new pensioner poverty prevention index in the long- term. This will help the Government to better manage the volatility of costs associated with the mechanism for increasing the State Pension level, whilst also ensuring the State Pension covers the basic needs for pensioners. Any rise in the State Pension Age should match increases in healthy life expectancy, with at least 15 years’ notice to allow people time to prepare.


25 April 2025