The demographic challenge

The UK’s demographic landscape is changing significantly, catalysed by an aging population and declining birthrates. These shifts exert immense pressure on pension systems and threaten their long-term viability. The broader problem is how to preserve pension schemes’ viability for future generations. 

This is why raising the state pension age, not just in the UK but further afield, is viewed as a pragmatic but controversial solution. By way of example, it’s being raised to 68 years in Ireland by 2028 and 67 in Germany by 2031. By extending the retirement age, the burden on pension funds is mitigated, allowing for better allocation of resources and fiscal sustainability. Furthermore, you can argue that a higher pension age aligns with the goal of promoting workforce participation among older people, harnessing their skills and experience to drive economic growth.

Here in the UK, the retirement age is expected to rise to 67 between May 2026 and March 2028. However, a recent report by the International Longevity Centre  opens with the argument that “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”. This warning is made even starker by the admission that this recommendation falls short by failing to consider factors like preventable ill-health. Once you do that and recognise the many reasons why people can’t work beyond 65, the situation gets even more critical. The report notes that any solution which depends on people working a lot longer will prove flawed as research shows that “by age 70, only 50% of adults are disability-free and able to work”. That’s a sobering statistic.
 

The inequality conundrum

Inequality remains a pressing issue within the UK. The current pension system exacerbates disparities that hit women, ethnic minorities and low-income individuals hardest. Raising the pension age could present an opportunity to address systemic inequalities. However, measures will need to be implemented that mitigate any adverse impact on vulnerable groups. This may involve targeted support mechanisms, such as enhanced access to education and training, and addressing barriers to workforce participation. But it’s so much more complicated than this. Research by the Institute for Fiscal Studies argues that raising the pension age from 65 to just 66 would encourage only eight in every hundred 65-year-olds to stay in work, barely achieving a balance between recovering the loss of pension they’d have received in exchange for a relinquished year of retirement. More importantly, the remaining 92% suffer financial loss, with a quarter of 65-year-olds ending up in poverty.

Health considerations clearly play a pivotal role in shaping retirement decisions and pension policies. Preventable ill-health poses a significant challenge as it’s a big contributor to premature exits from the workforce. We must recognise the interplay between health outcomes and retirement age, advocating for policies that promote healthy ageing and workforce participation. To support an ageing population, the UK needs more investment to improve business productivity, boost wages and maintain public services. The steady outflows from UK markets in recent years hasn’t helped. 
 

A healthy attitude to ageing

We also need to keep skilled people healthy for longer so that they can earn more for themselves and for the nation. The UK has performed poorly in this regard. Since the pandemic, roughly 400,000 more people have reported themselves as out of work because of injury or illness, taking the total to more than 2.5 million. To put that total in context, its 7% of the UK’s current potential work force. With fewer workers supporting more pensioners, the ability to pay pensions and provide healthcare will become more difficult. Immigration can help ameliorate this, but even with very high estimates of immigration, the Office for National Statistics forecasts the number of pensioners to every 1,000 workers to rise from 290 to 346 by 2050. You can have a go at fiddling with the assumptions yourself.

We’ve recently been thinking a lot about income mandates as a tool to help ageing populations deal with the challenges and opportunities of a world where it will be necessary to consider a more ‘malleable’ approach to working lives. You could argue that this somewhat ‘Pollyanna-ish’ view fails to recognise the clear discrepancies between what some people are able to do in later life, and what will be years of increasing hardship for others. We must recognise an inconvenient truth: many people just won’t be able to work for significantly longer. And this raises some more deeply entrenched and intractable problems.

However, we still need to contemplate what we have referred to as the malleability of old age , the power of longer health spans, and the importance of being able to contribute to society well beyond traditional pension ages. That’s because all this will demand taking on greater risk exposure in our savings and investments at an older age. It also highlights the advantages of being able to draw on an additional income stream when appropriate or necessary. Indeed, in terms of investment and savings, the Financial Conduct Authority has flagged that too many Brits are underinvested. Almost 60% of people with more than £10,000 in investable assets have more than three-quarters of it in cash (and it’s getting worse over time). Any improvement in the UK public’s appetite to invest could help move the needle on demographic difficulties. It would also help boost expected returns, increasing wealth that people can draw on in retirement.

In a piece this short we can barely scratch the surface of a very complex and emotive topic. But that shouldn’t mean we don’t think about your fund as a solution to a problem, while also considering the investment opportunities that demographic change, longevity and extended health spans may well present.