The 'cost' of living
We are all living longer. That is one of the messages that keeps popping up in news headlines where pensions are concerned. Analysts predict that in just twenty years’ time a quarter of the entire adult population will be over 65 and the number of people over 85 will have doubled. And as one-in-four children born today are predicted to live to be 100, schemes are going to have to get used to paying benefits for much longer than in previous generations. Increased longevity of members is one of the big issues facing pension schemes at the dawn of the twenty-first century.
To give you an idea of the rate of change, in 1950 there were eight people working for every pensioner. In 2008, there were four workers for every pensioner and by 2050 there could be only two. Clearly the maths is scary; but what is the solution? Nobody has found one yet, but different schemes are trying different things to maintain the balance between types of assets held and the liabilities they are going to have to pay.
Current options open to defined benefit (final salary) occupational schemes like the RPS include increasing the level of contributions being paid in by active members and employers and/or changing the benefits payable from the Scheme. Then there is always the question of investment strategy. Trustees of pension schemes have to balance the degree of risk against the need to generate returns, when deciding which assets to invest in.
The advances we are seeing in medical science and technology have made leaps and bounds over the past few decades, not only in extending life expectancy, but also improving the quality of life for people in retirement. So not only are we living longer, but we are more active too. The trick is to work out how to adapt structures designed for a retirement period of say ten or eleven years, to support a potentially healthy retirement period spanning a quarter of a century or more.
In 2007, pensioners outnumbered children for the first time. Here are some more interesting statistics and projections from the Office of National Statistics (ONS).
- The number of people over 50 is expected to rise by over a third in the next 25 years.
- Today there are 10,000 people aged 100 or over. By 2050 there will be 250,000 centenarians and King William V could be sending 10,000 birthday cards a month.
- The first 120-year old in the UK is expected in 2063. That means she is now 65 and has already started drawing her pension. Ultimately she will have drawn her pension for half her lifetime.
- In 1960, a man of 65 could expect to live 11 years in retirement. Today, the same man could have a retirement of 20 years rising to 25 years by 2054.
- Today, four in five of us live to collect our state pension and live, on average, for a further 24 years - that’s a third of our adult lives in retirement.
Source: ONS Population Projections of Life Expectancy - Demographics