The UK government’s Keep Britain Working report, published earlier this week (5 November) made for stark reading, warning that the UK is sliding into an economic inactivity crisis.

According to the report, more than one in five working-age people are now out of work and not looking for work, higher than in many comparator countries, as in the Netherlands this is around 14.5 per cent, whilst in Denmark it is around 17.7 per cent.

Ill-health is the most significant driver, as the report revealed that 2.8 million working-age people are now economically inactive due to health conditions – 800,000 more than in 2019, representing a 40 per cent rise.

And more people are in work with work-limiting health conditions or disability than ever before, with the government’s analysis suggesting that, without action, another 600,000 could leave work by 2030.

The report also emphasised that while we are growing older and living longer, we are also getting sicker sooner, and the interaction between work and health is not keeping pace - an important finding given recent calls for the state pension age review to consider healthy life expectancy, rather than just life expectancy, when setting the state pension age.

The findings have been welcomed by industry experts, with Standard Life Centre for the Future of Retirement director, Catherine Foot, emphasising that "there is a clear need for reform to tackle economic inactivity due to ill-health and disability".

"The review rightly highlights that small changes won’t be enough; we need coordinated action across government, employers, and health services to create better pathways into and back into work," she continued.

“Enabling people in their 50s and 60s to enter and stay in good work is not only vital for national economic growth, it’s also essential for individual financial resilience. Supporting longer working lives helps people continue earning and saving, reducing the risk of pre-retirement poverty and the need to draw down pensions too early."

But it is not only older workers that are increasingly leaving the labour market due to ill health, as the government's Keep Britain Working report found that young adults are being hit hard.

According to the report, growth in 16 to 34-year-olds with a mental health condition who are economically inactive due to long-term sickness is particularly concerning, having risen by 190,000 (76 per cent) between 2019 and 2024.

This is not a new trend, however, and, similar to the longevity concerns being seen in the UK, it is also not an issue that is isolated to just the UK.

Indeed, our sister title, European Pensions, has recently been following the trend surrounding the growing number of workers, particularly young people, exiting the labour market early, with many European markets reporting steep increases in disability pension claims linked to stress, anxiety, and depression - particularly among younger workers.

In much of Europe, this has had a significant impact on the pensions industry, as many pension providers and systems are designed with disability pensions as a safety net for workers when health fails.

But as European Pensions’ recent feature explored, there is a dichotomy between countries and/or schemes that provide it as a pension benefit, and those that don’t.

In some countries, payments are provided directly from pension providers and funds (sometimes as an add-on insurance), whereas in others, incapacity to work is covered by a separate insurance (through employee benefit packages or personal policies) or state benefits.

Meanwhile, countries that have seen a big shift from defined benefit (DB) to defined contribution (DC) schemes, such as the UK, have seen the link between pension support and ill-health diminish.

However, while these schemes do not have a responsibility for disability pensions, there can be indirect consequences.

For example, individuals unable to work due to ill health may accumulate lower savings, or they may access their DC pots earlier than intended, and before reaching state pension age.

Indeed, the UK’s Keep Britain Working report suggested that a person in their 20s who leaves the workforce can lose over £1 million in lifetime earnings and pensions.

And Haines Global Pensions co-founder and CEO, Colin Haines, argued that, although the reference to pensions in the review is minimal, "the connection is fundamental".

"Ill-health retirements increase pension costs, reduce individual retirement income and weaken labour-market participation. Preventing them strengthens both fiscal sustainability and fairness," he explained.

Speaking to European Pensions, Haines said that DC trustees do have some responsibility for members, as "DC members face a far harsher reality with ill-health retirement, meaning a smaller pension pot stretching out for decades and workplace benefits that could stop well before state pension age".

"DC trustees could monitor incidence, signpost support, and work with employers to limit the risk of financial hardship,” Haines suggested.

There are also broader lessons that the UK can learn from the systems where there is a responsibility to provide this safety net, as Haines argued that "international systems show what is possible".

In Finland, for instance, employer pension costs rise when disability rates increase, providing a direct incentive for prevention and early rehabilitation, while in Denmark, the disability-pension system links closely with municipal employment and health services, offering retraining or redeployment before permanent exit.

Haines acknowledged that the UK’s model is more individualised, explaining that, with fewer collective mechanisms and weaker sectoral bargaining, implementation will require closer collaboration between employers, unions, consultants and government to achieve similar results.

However, he argued that the UK, with both health and pensions responsibilities located within the Department for Work and Pensions, is well placed to align these agendas.

"A Healthy Working Lifecycle framework could bring together prevention, data analysis and pension adequacy under one structure," he stated.

"Doing so would allow government, regulators and employers to measure not only how many people return to work but also how these interventions improve long-term retirement outcomes."

There could be upcoming opportunities for the government to create this link, as Haines said that "the DWP’s work on preventing ill-health and supporting longer working lives needs to be aligned with the wider pensions-reform agenda, including the Pension Schemes Bill, the state pension age review and the new pensions commission".

"Linking these areas would help ensure that later working life and later retirement are both achievable and fair," he added.

But even without this alignment, many UK employers are likely to face growing pressure to take action, as the government's Keep Britain Working report stressed that "employers will need to do more".

"They are uniquely placed to act on prevention, to support rehabilitation, and to remove barriers for disabled people. They also stand to gain most from higher productivity and lower costs," it stated.

"Much of what’s required is not additional expenditure: employers already invest billions in health and wellbeing, but need greater clarity on what works. The priority now is to get them off the sidelines and onto the pitch."

This is another area the UK can learn from its European peers, as many pension providers and employers have recently been stepping up to take proactive steps against the growing inactivity rates.

This early intervention appears to be paying off. Danish pension provider, PFA, for instance, has used digital health solutions, AI-driven risk monitoring and workplace partnerships to reduce members’ risk of long-term illness by 70 per cent, while cutting two-year sick leave rates by 8.5 per cent.

Haines pointed out that the wider experience of the Nordic countries echoes this, showing that when health, employment and pension incentives are coordinated, participation and productivity both rise.

But more proactive management like that seen in European countries is needed in the UK, as Haines emphasised that ill-health retirements should be “firmly on trustee risk registers”.

“The Local Government Pension Scheme offers insurance to help employers manage large ill-health pension costs,” Haines said. “These examples show that practical models exist that other pension fund boards and trustees could adapt.”

---