International Longevity Centre - UK

‘Auto-enrolment’ into so-called Personal Accounts is probably the most innovative and interesting element of the Government’s proposed pension reforms. But auto-enrolment potentially throws up as many challenges as it solves.

These challenges were the basis of an ILC-UK debate last night, at the Institute of Actuaries – ‘Promoting Inertia: How should the Government sell Personal Accounts and what should its retirement savings message be?’

Auto-enrolment into Personal Accounts will be revolutionary, because it will be the first time in the UK that inertia in financial behaviour - a major cause of under-saving - will actually be used to help individuals save. 

With Personal Accounts on offer, what messages should the Government use to sell them to individuals? Keynote speaker Adrian Boulding of the Legal & General had 3 key suggestions for policymakers: 

* “Use it or lose it” – encourage individuals to ‘bank’ their employer contribution.

* “Everyone else is doing it” – use the consensus of widespread participation, given that people are usually happier following the crowd.

* “Which type of fund?” – assume individuals are enrolled in Personal Accounts and get them to think about the next-step, instead of withdrawing; or the ‘presumptive close’ as Adrian called it.

Using any of these messages, the Government might succeed in achieving widespread take-up of Personal Accounts. Which is where the problems start. How so? First, given a choice of whether to opt out of Personal Accounts, many employees are likely to display inertia, remaining in the scheme, but believing that they have ‘dealt’ with saving for their retirement. However, for many individuals, Personal Accounts will not be enough to meet their retirement income expectations. The Government will still need individuals to undertake additional saving; that is, to both do nothing and take action. This is where the ‘message’ gets trickier. How will individuals be encouraged to exhibit inertia by remaining enrolled in their Personal Account, while simultaneously being proactive about additional retirement saving? Is there not a clear risk that while Personal Accounts will help those who have previously not saved enough, they may also actually lead individuals with higher rates of saving to shrug off their personal responsibility, with the result that they save less?

Second, Personal Accounts are not suitable for everyone. One of the panellists at the debate, Niki Cleal of the Pensions Policy Institute, talked about research undertaken by her organisation, which analysed those people for whom remaining in Personal Accounts might not actually be the best option. This group might include those on low incomes with a broken employment history, who might therefore lose means-tested benefits. Another group is single people who are likely to rent in retirement, with no additional savings, who may be at risk of losing entitlement to housing welfare support. http://www.pensionspolicyinstitute.org.uk/news.asp?p=251&s=2&a=0 

One solution to both these problems might be to provide individuals with free, generic but personalised financial advice. It is this sort of approach that was put forward by Sue Regan of the Resolution Foundation, whose organisation has spent the last 18 months lobbying Government to introduce a national free generic financial advice service.

Sue argued that saving still has to be about personal responsibility. This approach flips over the ‘inertia-exploitation’ thinking behind the whole auto-enrolment approach. But so what? Generic but personalised financial advice would be able to encourage individuals to remain in Personal Accounts and undertake additional saving in order to meet their retirement income expectations. In addition, such financial advice could identify and inform those individuals for whom Personal Accounts are not suitable, whether because they would lose means-tested benefits, or they first need to pay off personal debt, or purchase life insurance. An advice service would also be useful with the not inconsiderable challenge of helping individuals enrolled in a Personal Account choose which type of fund to invest in.

The Government is extremely interested in how a national generic financial advice scheme would work, and has just commissioned Otto Thoresen to review the feasibility of such a scheme.  http://www.hm-treasury.gov.uk/independent_reviews/thoresen_review/thoresenreview_index.cfm 

Indeed, what seems to be happening is that the ‘generic advice’ agenda is emerging into the mainstream at just the right time, when the Government is thinking about how to make a success of Personal Accounts. There seems to be a growing consensus that to make Personal Accounts work, generic financial advice is needed. The DWPs Chief Economist, Robert Laslett, also recently put forward the argument that financial advice is key to rolling out Personal Accounts at a conference hosted by the Resolution Foundation.

We are witnessing a rare occurrence: two separate policy reform agendas are interlocking to the benefit of both.

Is that everything? Not quite. Lots of questions do remain about Personal Accounts, not least the tricky issue of compliance. However, as a final topic worth thinking about, our keynote speaker Adrian Boulding put forward a scenario worthy of consideration: those who do not enrol in ‘Personal Accounts’ will become financial ‘lepers’ of the future. Why? No financial adviser will want to go near them. If such an individual approached an adviser to buy some other savings product, such as an ISA, and the adviser did not recommend them to enrol in a Personal Account instead, given an ISA cannot match the employer contribution available in a Personal Account, the adviser might be at risk of future mis-selling litigation.

Many of the answers around Personal Accounts are falling into place, but there’s still some way to go.

Today’s column by Philip Stephens in the Financial Times (Tomorrow belongs to someone else) pinpoints a fascinating scenario that is dawning on policymakers and researchers: that the children of baby-boomers cannot expect a relative level of financial security as high as their parents. 

This is important because what is under threat is an underlying assumption of society about what each generation passes on to the next, and about the entire nature of ‘progress’ in society.  This needs some explanation. As technological change and globalisation continue to evolve, each successive cohort of the young have access to choices, labour-saving devices, luxury goods and holidays far beyond what their parents experienced. That is not in question.

However, stripping out inflation, will the children of the baby-boomers amass a pot of assets as large as their parents? House price inflation and defined-benefit pensions have combined to make the post-war cohort very well-off. Will their children achieve the same level of security?  Probably not. The inflation that paid off the mortgages of the baby-boomers seems unlikely to return, now that independent central banks have taken to targeting inflation so determinedly. And the generous pension plans that increasingly seem like some strange historical aberration will be replaced by much meaner schemes for today’s young.

The question, which Stephens fails to touch on, is what will happen to that wealth accumulated by the baby-boomers? Will it be used to meet their long-term care costs? Will it be redistributed by a capital gains tax on homes? Or will it be left to pass down within families as gifts and inheritance, entrenching inequalities. These are the vital questions for Government and the financial industry, and they provide an urgent research agenda that the ILC-UK will pursue.

Dr Alexandre Kalache, Director of Ageing and the Life Course at the WHO addressed an audience at Kings College this week, on the topic of ‘The Challenge of Population Ageing is Global- but Greater in the South’. The daily work of the ILC-UK is mainly focused on the UK, so this was a refreshing chance to take a global perspective on the phenomenon of ageing.
 
It is commonly known that in countries such as Japan, Germany and Italy, by 2025 about a third or more of the populations in these countries will be over 60. What is less well known is the rapid growth and importance of population aging in less developed countries. Currently more that 70% of older people live in the global ‘south’ and this is projected to increase to more than 80% by 2025. Developing countries face significant challenges because of their growing older population. Dr Kalache pointed out that compared to the developed world, the socioeconomic development in developing countries has often not kept pace with growth in ageing. For example, while it took 115 years for the proportion of older people in France to double from 7% to 14% it has taken only a generation or a little more in southern countries such as Brazil. In most developed countries, population aging was a gradual process following steady socio-economic growth over several decades while in developing countries this has been significantly compressed. As Dr Kalache put it: “developing countries are becoming old before they become rich while developed countries became rich before they became old.”  Thus, developing countries will face significantly more socioeconomic challenges associated with ageing populations than countries in the ‘North’.
 
Another difference is that ageing in developing countries ‘feminized’. While in the North women tend to live longer than men, in countries such as Sierra Leone and India, men and women have about the same life expectancy; this being indicative of the deprivation of opportunities for girls, such as education.
 
Dr Kalache argued that while some people viewed aging as a problem, it was not; it was a challenge and one that we could meet.  He stressed that a healthy older person is valuable resource: a resource to the family, to the community and to society in general. We should therefore aim to encourage and support healthy and positive ageing. 

Primrose Musingarimi

This week’s On Management column in the FT saw Stefan Stern draw attention to the growth and plight of our ageing workforce (‘Don’t get fooled again - you’re not too old for the job’). He encourages us all to address this issue, saying: “It’s not just Actuaries and pensions advisers who have had their expectations confounded by increased longevity. All of us are having to reassess our views on age.” 

“Businesses need to get much smarter about age, and fast. The demographics insist on it. And it is no use expecting government to sort out these problems for you. In any case legislation has, so far, not proved terribly effective in bringing about what you call cultural re-education in this area.”  

Stern cites me and an argument I made at a recent public debate on these issues, where I said that in failing to make better connections between generations whether at work or in the wider community, we risk polarising young and old, almost setting them up in opposition to each other, just at a time when we need to think harder about the financial implications of our ageing society. 

Indeed, unless the combination of innovation, energy, skills and experience is maximised one can’t help but see this potential conflict. This conflict is between the ‘golden generation’ who have been investing in their homes and benefiting from good final-salary pensions, the ‘baby boomers’ who are buying property instead of saving and the younger generation who are getting into serious debt.  Current elders have had the attitude of saving to benefit their children but now these savings are increasingly needed for their parent’s living expenses, leisure time and, more urgently, paying for long term care.   Recognising a potential for conflict between the generations, the sooner there can be intergenerational approaches to these problems in communities and the workplace, the better society will be. We need a more positive attitude to increased longevity, more effort to grasp ageing as an opportunity, and to challenge the prejudices that exist, so as to avoid wasting the experience and talents of both young and old working together.   

If someone gave you £200 just before Christmas, what would you do with it? If you’re a pensioner, the Government believes you would spend it on heating your home. We saw this again today in the Chancellor’s Pre-Budget Report, which included: “the continuation of Winter Fuel Payments of £200 for households with someone aged 60 or over, rising to £300 for households with someone aged 80 or over, for the duration of this Parliament.”  Winter Fuel Payments are the Government’s response to the continuing problem of Wintertime death and illness among older people. According to Help the Aged, last Winter, more than 25,000 people over the age of 65 died as a result of cold related illnesses.   

Sitting in a Brussels café after the First Forum on Europe’s Demographic Future, I’ve time to write some thoughts on the previous 36 hours. The European Commission brought together the Forum’s 400 delegates in the Charlemagne building for the first of a bi-annual series to discuss how the continent should respond to demographic change. The Forum highlighted some of the dilemmas confronting the Commission as it tries to prod member states to address the challenges of demographic change in Europe.