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The Ageing Population - Burden or Benefit?

The Actuarial Profession's first international conference on "The Ageing Population - Burden or Benefit?" was held in Edinburgh on 20-22 January 2002. The delegates were a good mix of actuaries and non-actuaries. Actuaries, academics, economists, politicians and others from both within and outside the UK gave talks. Rajeev Shah and Simon Spencer, from Barnett Waddingham's Life insurance consultanc team, report on the main messages arising from the conference.

The most publicised and attended event in the programme was the Faculty of Actuaries debate on "The Ageing Population - Burden or Benefit?" which was also open to non-delegates.

There was general consensus on all the messages with the only exception being the issue of government funding for long term care.

The main messages

  1. The ageing population challenge is a combination of increasing longevity, falling birth rates, reducing effective retirement ages and the effects of post-war baby booms leading to a projected increase in the ratio of pensioners to the number of people of working age.
  2. If these trends continue then the total number of people of working age in the western world would be reduced. This could impact on economic growth rates as increases in GDP are correlated to increases in the population of working age people.
  3. The increase in the retired and elderly populations will increase the need for pensions, healthcare and long term care. This will increase costs for the countries affected unless their public provision systems are adjusted.
  4. The UK is not alone in having an ageing population. Most of the western world and China are facing similar challenges. In fact, the situation in the UK is less severe than in most other countries (with the exception of the old commonwealth countries). Italy and Japan were identified as the countries facing the biggest challenges.

UK pensions

  1. The UK pension system is seen as highly fragmented and complex with unintended effects arising from the interaction of the different components. The key issue for the UK is pensioner poverty rather than affordability.
  2. A major concern is the poverty trap that arises when those on low incomes save for their pensions only to see that they are not much better off than those on similar incomes who did not save. The government's Minimum Income Guarantee and Pension Credit initiatives address this in the short term, but in the long term they only shift this problem higher up the income scale.
  3. Also, as the Minimum Income Guarantee is expected to be linked to earnings while the basic state pension is linked to price inflation, more and more people will be drawn into claiming means tested benefits. However, the take up of means tested benefits is poor leaving many eligible pensioners in poverty. This would appear to contradict the aim of the Minimum Income Guarantee of alleviating pensioner poverty.
  4. The need for greater flexibility about retirement ages was recognised with a particular suggestion that retirement should be phased over time allowing people to work part time over their last few working years while also drawing pension benefits. This would need to be done concurrently with removing ageism from employment policies.
  5. There was support for raising the state pension age gradually. At the Faculty debate, opinions were aired that the state pension age should be set by an independent body in the same vein as the Monetary Policy Committee.
  6. There was general agreement that occupational pensions need to be redesigned to be somewhere in between the defined benefit and the defined contribution extremes.

Healthcare and Long Term Care

  1. There was recognition that ageism existed in the provision of healthcare and long term care.
  2. Will increasing longevity also increase healthy lifespans or just result in longer periods of ill-health at the end of life? Healthcare and long term care costs will depend on this. Future medical inflation is also a key driver of costs and the introduction of expensive technology that increases longevity without increasing healthy lifespans would lead to severe pressures on health budgets.
  3. Consumers are unsure of what long term care insurance would cover as the UK government's policy on paying for long term care is unclear. They are therefore unwilling to buy long term care insurance (though affordability plays a part in this too). Given that the risks are not quantified, insurers are also reluctant to provide long term care cover.
  4. The Royal Commission on Long Term Care had recommended that the government pay for personal care and individuals be responsible for the "hotel" costs. The UK government did not accept this but the Scottish government is in the process of implementing this recommendation. A major part of long term care is provided informally (e.g. at home by relatives and friends) and the UK government was concerned that the introduction of government funding for personal care would lead to the provision of care shifting from informal (and unpaid) to formal care resulting in much higher costs for the government. This was disputed very much at the Faculty debate (with ONS surveys indicating that provision of funding for long term care would actually lead to more informal care being given) and everyone is keen to see how the Scottish experience develops. If personal care were to be funded by the government the risk assessment for  long term care insurance will also become clearer leading to greater interest in this market from insurers.

Longevity projections

The evidence so far is that more people are living to old age rather than oldest ages increasing, however nobody knows whether there is a maximum lifespan.

Barnett Waddingham, February 2002.