Happy pensioners, happy covenant advisors

Remote working has been a lonely journey, but 2020 was even more difficult for the clinically vulnerable groups (older people included), with shielding inevitably having had an impact on the individuals’ mental health.

As covenant advisors, securing a safer financial future for pensioners is at the heart of what we do, but how important is the pension system to overall welfare and happiness?

Alisoun Milne, Professor of Social Policy at the University of Kent, provides an insight into this question by considering the causes of mental illness amongst older people in her book, “Mental Health in Later Life”. She suggests that age-related losses (e.g. physical losses) can be the causes of mental health issues, but life course and structural risks, such as domestic abuse, poverty, poor housing and discrimination could also play a significant role.

Interestingly but probably not surprisingly, equality is also a very important contributing factor to older people’s well-being and mental health, and this is closely linked to the financial security of the individual. Literature around the risks that minority ethnic groups and women are exposed to suggests that later life poverty may be caused by gender or ethnicity-related inequalities across their lives, including, for example, reduced opportunity to build up an occupational pension. This suggests that those who leave well paid jobs with an occupational pension could be more likely to have a happy retirement compared to those who are dependent on the state retirement pension.

That being said, state pension and welfare benefits remain crucial to maintaining living standards among older people, with the latest data suggesting that state-funded benefits account for about 40% of the overall income of UK pensioners and 80% of the incomes of the poorest elderly people. According to Professor Milne, an overarching trend is that although the numbers of older people living on low incomes fell significantly until about 2010, progress has now slowed down. This partly reflected changes to welfare benefits and reductions in overall allowances. Compounded with increases in energy and food prices, inequality can widen quickly. This shows the irreplaceable role that the state pension plays in social policy and the well-being of the less-privileged pensioners.

Putting the fundamental structural issues aside, evidence still shows that having access to a reasonable income in the form of an occupational pension has a positive impact on mental health in later life. This is because it improves the ability to make choices, which has a direct and positive effect on levels of anxiety and stress. In general, evidence suggests that different pension systems could impact older people’s mental health through two main channels:

  1. the change to the length of one’s working life and therefore the trade-off between satisfaction gained from work and from retirement life, and
  2. the income effect.

To that end, the pension system does appear to improve mental health and overall well-being in later life. This highlights the important role of covenant advice and pensions risk management more broadly and I am happy to be able to contribute.

Tracy Chih-Han Liu, Associate Director

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