Private pension crackdown could ease UK worker shortage crisis

STAFF shortages in the UK that have driven up inflation will only get worse unless the government takes further action to discourage early retirement – including a potentially unpopular crackdown on private pension pots.

That’s according to new analysis by Bloomberg Economics, which says easy access to generous private retirement savings is contributing to the inactivity crisis holding back the economy by allowing people as young as 55 to leave the labour force.

Employers are still struggling to get hold of staff because labour force participation, the share of the working-age population with a job or looking for one, has failed to fully recover from the pandemic. 

It is still half a percentage point below its rate at the end of 2019 and is on track to continue falling as the population ages, according to Ana Andrade and Dan Hanson of Bloomberg Economics.

Both the number of people in employment and hours worked are below pre-Covid levels and inactivity – those who are neither in a job nor seeking one – is 450,000 higher than before the pandemic. Labour shortages are harming the economy by fuelling inflationary pay increases and reducing the speed limit on potential growth.

A spike in long-term sickness appears to have been the major factor but the research shows the bigger issue is early retirement, which “is something that looks specific to Britain.” Over half the increase in inactivity can be explained by demographics as “people move to age brackets that have structurally lower participation rates.”

Chancellor of the Exchequer Jeremy Hunt is trying to address the problem. He has introduced more childcare support, removed a pension distortion that was encouraging people to retire early and brought in welfare reforms that require benefit claimants to take jobs.

However, Hanson and Andrade said the measures will only boost the participation rate by 0.3 percentage points and “won’t be enough to offset the drag on activity from population ageing.” The participation rate is set to be lower five years from now than it was in 2019 and still falling.

Instead, Hunt should “incentivise older workers to stay in the labour force for longer.” The aim should be to lift “the participation rate of those older than 55, which is structurally low.”

SEE ALSO

UK inflation more home-grown, says BOE Deputy Governor

To do so, he will need to take “ambitious – and unpopular” decisions. He could raise the age at which private pensions can be drawn from 55 currently, remove the 25% tax-free lump sum and limit the pace at which people can withdraw money. 

UK private pensions are considerably more generous than the average of other advanced economies, they added.

Long-term sickness has had less of an impact than appears because the increase has been among the already inactive, rather than removing workers from the labour force. 

Even so, Hunt could lift participation by clearing National Health Service backlogs and bringing more women into the workforce by giving second-earners, typically women, a “work allowance so they can look for jobs without fearing cuts to benefits payments,” Andrade and Hanson wrote.

“In many ways the challenge has just begun. An ageing population will act as a huge drag on growth over the next decades.” BLOOMBERG