Demographic time-bomb affects pension planning

Lord Turner’s vision includes people working longer, retiring later, saving more and receiving better pensions. I agree with him on all of this. What he proposes is radical enough.The state will concentrate on keeping pensioners out of poverty. It will stop bothering to provide salary-related pensions as it does via the Second State Pension or State Earnings Related Pensions. The extra pension needed will be funded by private savings, such as a National Pensions Savings Scheme (NPSS), occupational schemes and personal schemes. NPSS funds will be invested while the state pension continues to be funded out of tax and national insurance contributions.

This is a radical change in philosophy, I’ll give him that, but it is not enough to solve the problems we are going to face in the near future. I see three fundamental flaws in the philosophy.

Firstly, the pace of change proposed is too slow. Lord Turner calls it evolutionary, which is management speak for slow. It will take five years just to set up the NPSS. The first increases to the state retirement age will not take place until 2030, and even then he proposes an increase to just age 68 over the following 20 years.

Secondly, the mortality assumptions the Pensions Commission has used are quite unsuitable. The mortality assumptions used today by UK actuaries build in an anticipation of future improvements to longevity. They already know that these assumptions understate the actual improvement. But they do not take into account the huge leaps in longevity which are already being talked about in the scientific arena.

Thirdly, there is a demographic time bomb on its way, as everyone keeps telling us. Within ten years, our available workforce will have reduced by 20%. So the very concept of what economists call the "intergenerational system" will be under even greater strain than it is today.

Before we look at the future, let us turn back the clock a few years. When my father was my age, his official life expectancy was 78 years. We are now 30 years on and my own life expectancy is 82 years. In 30 years time, my son will be my age. What do you suppose his life expectancy will be? If you extrapolate even just linearly, it will be nearly 90 years. Add to this the usual factors to allow for improvements to life expectancy and it will be nearer 100 years. So my son will work for, say, 40 years, retire at age 67, and then have to fund a further 30 years of retirement before he dies. Hmm. The maths are rather worrying.

Now, I know what follows is a fruitcake idea because when I raised it recently in a room containing three of my own company’s most senior pensions experts and two equally senior pensions consultants, they all laughed at me. Let’s say the scientists working on the human genome and those working in our pharmaceutical labs put their heads together and come up with a way of freezing or slowing down the degeneration of the human body’s cells and thereby its vital organs. The result would be that you or I could reach age 50, say, and carry on feeling 50 years old for years to come. We could continue to lead a fully active life for much longer. Some experts are predicting humans could live to 120 or 150 years. Sounds great, but we could be retired for longer than we have actually worked for. Now the maths really starts to get worrying. One answer is to remove compulsory retirement ages completely. Other countries are ahead of us on this, having been brave enough to admit long ago the inevitable collapse of the traditional social security system. We would all, on reaching age 50, take our medicine to arrest the ageing process and carry on working for a further 50 years. This would also defuse the demographic time bomb as we wouldn’t need so many younger workers to replace those retiring.

In conjunction with this, we would need to remove the compulsion to buy an annuity and let us have the whole fund in cash, preferably paying far less tax or none at all, to re-invest as we wish. This would suit employers with occupational schemes as from a long-term funding perspective it would protect them against the longevity problem.