Planning Pensions for the 21 st Century: Meeting the Challenges of an Ageing Society Jane Falkingham ESRC SAGE Research Group London School of Economics.

Planning Pensions for the 21st Century: Meeting the Challenges of an Ageing Society

Planning Pensions for the 21st Century: Meeting the Challenges of an Ageing Society

Jane FalkinghamJane Falkingham

ESRC SAGE Research GroupESRC SAGE Research Group

London School of EconomicsLondon School of Economics

Ageing Population – Benefit Or Burden?Ageing Population – Benefit Or Burden?

Edinburgh, ScotlandEdinburgh, Scotland

22nd January 200222nd January 2002

OverviewOverview

• The challenges of an ageing population: The challenges of an ageing population: demographic, economic & policy legacydemographic, economic & policy legacy

• Pension systems: desirable criteriaPension systems: desirable criteria

• New Labour’s pension settlementNew Labour’s pension settlement

• Ways forward in the 21Ways forward in the 21stst Century Century

The challenges of an ageing population: demographic context


• Increasing proportion of pensioners in the Increasing proportion of pensioners in the populationpopulation• 1901 5% aged over 601901 5% aged over 60• 2001 20%. 2001 20%. • 2021 25%2021 25%



• Increasing proportion of pensioners in the Increasing proportion of pensioners in the populationpopulation• 1901 5% aged over 601901 5% aged over 60• 2001 20%. 2001 20%. • 2021 25%2021 25%

• Increasing time spent in retirementIncreasing time spent in retirement• Female life expectancy at age 60Female life expectancy at age 60 21.3 in Scotland; 22.8 in England21.3 in Scotland; 22.8 in England



““Old age is the most unexpected of all things Old age is the most unexpected of all things to happen to a man” to happen to a man”

Excerpt from Leon Trotsky’s diary, Mexico Excerpt from Leon Trotsky’s diary, Mexico 1935.1935.

• The normalisation of old age means it is no The normalisation of old age means it is no longer a ‘risk’ to be insured againstlonger a ‘risk’ to be insured against

0

20

40

60

80

100

15 20 25 30 35 40 45 50 55 60 65 70 75

1916-201931-351946-501961-65

Age

%

Source: Evandrou and Falkingham, 2000.

Changes in Working Life: Proportion of men in employment by birth cohort

Changes in Working Life: Proportion of men in employment by birth cohort

The challenges of an ageing population: economic contextThe challenges of an ageing

population: economic context

• 1 in 3 people aged 50 to retirement age are 1 in 3 people aged 50 to retirement age are

not in employment.not in employment.

• The proportion of men aged 50-65 not in The proportion of men aged 50-65 not in

employment has doubled since 1979.employment has doubled since 1979.

The challenges of an ageing population: policy context


Changes in the welfare mixChanges in the welfare mix




• A devalued basic pensionA devalued basic pension





• Growth in occupational pensionsGrowth in occupational pensions

Current membership of occupational pension scheme by sex and socio-economic group (%)Current membership of occupational pension scheme by sex and socio-economic group (%)

0

10

20

30

40

50

60

70

80

All Prof Emp/man Int non-man

Jun non-man

Skilledman

Semi-skman

Unskilledman

Men f/t

Women f/t

Women p/t

Source: General Household Survey 1998

%






• Personal pensionsPersonal pensions• Individualisation of riskIndividualisation of risk






• Personal pensionsPersonal pensions

• Partnership in pensions’ state:non-state Partnership in pensions’ state:non-state

balance to shift from 60:40 to 40:60balance to shift from 60:40 to 40:60

Rising Pensioner Incomes:Average gross income, 1979 and 1996/7

Rising Pensioner Incomes:Average gross income, 1979 and 1996/7

0

50

100

150

200

250

1979 1996/7

£ p

er w

eek Other

EarningsInvestmentOcc PenBenefit income

Source: Table A1 The Pensioners’ Income series 1999/00Note: all figures July 1999 prices

Rising Inequality:Median net income of pensioner couples, 1979 and 1996/7

Rising Inequality:Median net income of pensioner couples, 1979 and 1996/7

050

100150200250

300350400450500

1979 1996/7

£ p

er w

eek Bottom fifth

234Top fifth

Source: Table A13 The Pensioners’ Income series 1999/00Note: all figures July 1999 prices

The challenges of an ageing population: pensioner povertyThe challenges of an ageing

population: pensioner poverty

• Over a quarter of pensioners have incomes in Over a quarter of pensioners have incomes in

bottom fifth of the income distributionbottom fifth of the income distribution

• 38% of single female pensioners and 81% of 38% of single female pensioners and 81% of

married female pensioners have gross incomes of married female pensioners have gross incomes of

less than £100 per weekless than £100 per week

• Single female pensioners have the highest risk of Single female pensioners have the highest risk of

experiencing persistent povertyexperiencing persistent poverty

The challenges of an ageing population

The challenges of an ageing population

• More older people, living longerMore older people, living longer

• Shorter working livesShorter working lives

• Greater diversity, growing inequalityGreater diversity, growing inequality

• Changing pension mix, increasing Changing pension mix, increasing

individualisation of riskindividualisation of risk

Pension systems: desirable criteriaPension systems: desirable criteria• AdequacyAdequacy• Administrative efficiencyAdministrative efficiency• AffordabilityAffordability• EquityEquity• Political sustainabilityPolitical sustainability• Protection of incentivesProtection of incentives• TransparencyTransparency

Any reform involves a trade-off between these criteria.Any reform involves a trade-off between these criteria.

New Labour’s pension settlementNew Labour’s pension settlement

Pre 1998Pre 1998

First tier state provisionFirst tier state provisionBasic State PensionBasic State PensionIncome SupportIncome Support

Second tier compulsory optionsSecond tier compulsory optionsSERPSSERPSOccupational PensionsOccupational PensionsPersonal PensionsPersonal Pensions

Third tier voluntary optionsThird tier voluntary optionsAVCsAVCs

New Labour’s pension settlementNew Labour’s pension settlement

Pre 1998Pre 1998 Post 1998Post 1998First tier state provisionFirst tier state provisionBasic State PensionBasic State PensionIncome SupportIncome Support

Basic State PensionBasic State PensionMinimum Income GuaranteeMinimum Income GuaranteePension CreditPension Credit

Second tier compulsory optionsSecond tier compulsory optionsSERPSSERPSOccupational PensionsOccupational PensionsPersonal PensionsPersonal Pensions

SERPSSERPSState Second PensionState Second PensionOccupational PensionsOccupational PensionsStakeholder PensionsStakeholder PensionsPersonal pensionsPersonal pensions

Third tier voluntary optionsThird tier voluntary optionsAVCsAVCs AVCsAVCs

New Labour’s pension settlement: delivering adequate incomes?




Today’s PensionersToday’s Pensioners• Focus on Minimum Income Guarantee Focus on Minimum Income Guarantee

• Extension of means-testingExtension of means-testing




• Extension of means-testingExtension of means-testing• Problems of take-upProblems of take-up




• Extension of means-testingExtension of means-testing• Problems of take-upProblems of take-up• Problems of incentives to saveProblems of incentives to save




• Extension of means-testingExtension of means-testing• Problems of take-upProblems of take-up• Problems of incentives to saveProblems of incentives to save

• Pension CreditPension Credit• Another layer of complexityAnother layer of complexity



Tomorrow’s PensionersTomorrow’s Pensioners• State Second PensionState Second Pension




• Target group < £10,000 per annumTarget group < £10,000 per annum




• Target group < £10,000 per annumTarget group < £10,000 per annum• ? Adequacy In 2050, BP+ S2P > MIG by £1? Adequacy In 2050, BP+ S2P > MIG by £1




• Target group < £10,000 per annumTarget group < £10,000 per annum• ? Adequacy In 2050, BP+ S2P > MIG by £1? Adequacy In 2050, BP+ S2P > MIG by £1• ? Incentives & means-testing? Incentives & means-testing




• Target group < £10,000 per annumTarget group < £10,000 per annum• ? Adequacy In 2050, BP+ S2P > MIG by £1? Adequacy In 2050, BP+ S2P > MIG by £1• ? Incentives & means-testing? Incentives & means-testing• ? Equity? Equity

New Labour’s pension settlement: delivering for the next generation?New Labour’s pension settlement: delivering for the next generation?

• ? Transparency ? Transparency

New Labour’s pension settlement: delivering for the next generation?New Labour’s pension settlement: delivering for the next generation?

• ? Transparency? Transparency

• ? Political sustainability of:? Political sustainability of:• a system of separate and incoherent elementsa system of separate and incoherent elements

• a system targeted on the lifetime poora system targeted on the lifetime poor

• a system designed without due regard to the a system designed without due regard to the futurefuture

Ways forward in the 21st Century

Ways forward in the 21st Century

• Pensions policy is the oil tanker of social Pensions policy is the oil tanker of social policypolicy

• Need a system to deliver for both today’s Need a system to deliver for both today’s pensioners and tomorrow’spensioners and tomorrow’s

• Go ‘back to basics’Go ‘back to basics’• Think the unthinkableThink the unthinkable

Planning Pensions for the 21 st Century: Meeting the Challenges of an Ageing Society Jane Falkingham ESRC SAGE Research Group London School of Economics.

Documents

overviewthe challenges

centurythe challenges

pricesthe challenges

englandthe challenges

welfare mixthe challenges

basic pensionthe challenges

policy contextchanges

birth cohortthe challenges