The Isle of Man caused some ripples in the pension world last week by revealing that it was considering increasing its state pension age to a Zimmer-frame shaking 74.
The Isle of Man Treasury is, in many way, faced with a monumental demographic problem which, to some, represents a microcosm of the issues we face on the mainland: how to meet the costs of an ageing population.
One difference is that Isle of Man politicians are going further than mainland politicians and being blunt about the demographic problems the island is facing. Government ministers on the Isle of Man have talked frankly about the island’s national insurance scheme going bust without radical reform. They deserve credit for at least levelling with the island’s population – a strategy too few mainland politicians are willing to countenance. In truth, no-one wants to be the bearer of bad news.
The Isle of Man is faced with a population enjoying increased longevity, the current life expectancy is 81, just a notch higher than the mainland. That is a great thing and to be celebrated but the current state retirement age is 65. The increase in state retirement age on the Isle of Man to 74, if it happened, would only affect someone born after 2011. With the increase in longevity it is not unreasonable to predict that a child born in this decade could reasonably expect to live to their nineties.
In comparison, it is worth remembering that the UK government is only planning to increase the age people would qualify for a state pension to 69 post 2040. The UK government has taken some sensible steps and has shown the way to some other European states reluctant to face up to reality but it still has a long way to go.
Interestingly, the Isle of Man state pension would be slightly more generous than that to be paid on the mainland, £180 versus the planned flat pension predicted to be around £155.
So the Isle of Man is not ungenerous but even so in 2013 the BBC reported that the island’s chief minister had said an ageing population posed the “biggest threat to the social and economic future of the Isle of Man.”
The island’s chief minister’s warning was echoed by the social care minister who said he feared that the national insurance fund will “start to collapse” within the next 20 years and that people under the age of 45 were facing a “future without acceptable state pension provision.”
The warnings came against predictions that the over-65 age group would grow by 75 per cent in the next 20 years on the island. A review produced for the Isle of Man by independent consultants forecast that without change the Manx National Insurance Fund, from which the state pension is paid, would be drained before 2050. The review predicted that the cost of providing pensions would rise from £100m in 2012 to over £1.1bn by 2072.
I am no scaremonger and these are just reports and predictions at this stage but they highlight the gap between the frankness of the Isle of Man government in tackling the issues head on and the head-in-the-sand attitude of UK ministers. Of course, with an election coming up soon now is perhaps not the time to warn the electorate that the future of the state pension is decidedly rocky in the UK. Demographics may be slightly different here but the direction of travel is the same. So what is to be done?
I am sure the readers of Financial Adviser have their own views but there is no obvious panacea. Encouraging those who want to work in their later years to carry on working makes a lot of sense, as I have said many times before. It has not just social benefits but also financial ones. Providing tax and pension incentives for older workers makes perfect sense and older workers have a lot to offer the economy. I would put money on older workers being less of a burden on all aspects of government spending from healthcare to pension benefits if they carry on working and paying taxes.
Another solution could be to finally nail the lie that a pension is ‘optional.’ Government ministers and shadow politicians shamelessly ducked out of making auto-enrolment compulsory-enrolment when they had the chance. We are constantly told that many millions are being auto-enrolled and indeed they are but many are paying a pittance and significant numbers are avoiding auto-enrolment, because they are allowed to.
Being honest about the pension challenges we all face is not electoral suicideI cannot imagine any qualified financial adviser sitting down with a client in his 20s or 30s and telling him that a pension is ‘optional’ – it simply is not a valid or common sense recommendation.
Isle of Man ministers deserve praise for showing their bigger mainland cousins that telling the truth to the population and being honest about the pension challenges we all face is not electoral suicide, it is the right thing to do and it may just avoid a disaster.
Kevin O’Donnell is a financial writer and journalist
