When a population is ageing providing pensions be-comes more of a burden. Fewer people at work have to support a larger number of pensioners. Since the 1960s the decline in the birth rate has combined with an in-crease in longevity to produce a demographic decline that, in Britain, is mitigated only by immigration.

Figure 1 shows how the birth rate has declined since the 1960s in England and Wales. Reduced fertility in the 1980s and 1990s means that fewer British-born young workers are entering the work force in 2008, and that will remain the case for the next 20 years. It is also apparent, from Figure 1, that the birth rate fell below the replacement level in 1973, the year in which, hardly by coincidence, the hormonal contraceptive “pill” was made available free via the National Health Service. Legally induced abortions, available and paid for by the National Health Service since the 1968 Abortion Act, have also been contributing to the decline in the birth rate. Since 1973 the shortfall below replacement level, in England and Wales, has been quite closely matched

Future pensions: future poverty?

The British pensions system is in trouble. The Government is reforming it, but is neglecting multiple blows from demographic decline that will hamstring the new regime. Patrick Carroll finds that increasing numbers of today’s workforce will face old age in poverty.

‘American Gothic’, by Grant Wood, 1930. Grim self-reliance, and working long into old age, may be the only options for future pensioners. Image courtesy of The Art Institute of Chicago: Friends of American Art Collection.

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by the total abortion rate. In recent years, however, there has been some recovery in the birth rate and also some further increases in the abortion rate. Th e offi cial 2006-based population projections assume a birth rate for future years of 1.80, which is somewhat below the replacement level of 2.071. We shall con-tinue to depend on immigration to maintain our population.

Figure 2 shows the expected future improvement in life expectancy, which will increase the number of people of pensionable age—again these are the fi gures as used in the

latest 2006-based offi cial population projec-tions1. Men’s mortality has improved more than women’s but women still can expect to live longer after retirement, even when nor-mal retirement age has equalised for men and women.

Th e ageing of the population does not only mean paying more pensions for longer; it reduces the available earning capacity to pay for those pensions. Th e dynamism of an economy, and its ability to attract immigrants, is impaired by a lack of the young consumers that advertisers pay more to reach. An ageing

population with a dwindling proportion of young consumers invites economic slowdown, as is clear from continental Europe and from Japan. Germany, Italy and Japan, which were the model economic success stories in the 1980s, are now struggling to escape from seri-ous recession for these demographic reasons.

Revenue from salary-related pension contributions, into both national and private pension systems, is reduced by such economic decline. So are investment returns on invested pension funds. Worldwide, as birth rates de-cline, there are reduced prospects for corporate profi ts. Overseas investment by funded pen-sion schemes can hardly provide a means of escaping the consequences of demographic decline at home when most countries have re-duced birth rates below the replacement level. Nor can migration avert population decline for the world as a whole. Pension providers will therefore be unable to provide at the levels that they have in the past. Th e people who will suff er are the pensioners.

Th e UK has led the way with large, privately funded schemes, where money is invested now to pay for future pensions. Typically these were fi nal salary schemes, which have provided salary-related benefi ts. When funded schemes are largely invested in equities, as in the UK, a stock market decline opens up pension fund defi cits. Compliance costs imposed by recent pension reforms have also made such schemes less attractive to em-ployers and many defi ned benefi t schemes are closing down. Th ere is a loss of confi dence in private pension provision. Fewer of the work-ing age population are covered as members, or by their partners being members, of private schemes. British private pension provision has deteriorated at the same time as the costs of state pensions are threatening to become unsustainable as the number of pensioners grows.

Th e Government is, naturally, concerned. Th e Pensions Commission, chaired by Lord Adair Turner, was set up in 2002 to review British pension provision. It was given a strong mandate, which included consideration of com-pulsory measures. In a series of Pensions Bills being processed through Parliament, Turner’s main recommendations—such as raising the state pension age to 68 for both sexes and set-ting up a National Pensions Savings Scheme (NPSS) as set out in the November 2005 report from the Pensions Commission—are now being implemented2. It is unfortunate, therefore, that Turner’s main recommenda-tions have major fl aws.

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As regards strengthening the better pri-vately funded schemes the new legislation may actually be counter-productive. Th e Pensions Bill3 before Parliament this summer governs the establishment of the Pensions Protection Fund. Th is is already hastening the demise of fi nal salary schemes, which are required to pay the Pensions Protection Fund levy.

More fundamentally, too little attention has been paid to the nature of the increased longevity that is now apparent. Raising the state pension age to 68 was intended to reduce pension costs and to increase the numbers contributing. Its eff ects, though, will be limited by the increased prevalence of disability to be expected with longer life spans. Th e modern increase in life expectancy is mostly not dis-ability free. We are living longer but not in the best of health. Th ough some improvement

in health is expected there will be substan-tial increases in the numbers with signifi cant disabilities and those suff ering from major diseases. Among the newer immigrant groups we can expect a high prevalence of diseases such as stroke, congenital heart disease and diabetes in old age. Th e 2001 census reported higher rates of self-declared long-term activ-ity-limiting illnesses than the 1991 census. Already most men aged between 60 and 64 are not earning. Th ose aged between 65 and 67—especially the men—are unlikely to be fi t for work or in demand by employers when the state pension age of 68 takes eff ect, which will be, in the words of the Act: “progressively over a period of 22 years beginning with 6th April 2024”4.

Th e British system of pension provision has distinctive features such as contracting

out from the second state pension, and the predominance of funded company pensions schemes largely invested in ordinary shares. In contracted-out schemes members ac-crue fewer state pension entitlements and they should expect correspondingly more from their company scheme. Indeed, fi nal salary schemes, the most common form of contracted-out defi ned benefi t scheme, are now delivering good pensions to many re-tirees. But weaknesses are becoming more apparent in the British system. As most large companies are closing their fi nal salary schemes, fewer of those who retire in the future will benefi t from good occupational pensions from occupational schemes. Early leavers (all who do not stay in the scheme until retirement) receive necessarily smaller benefi ts in fi nal salary schemes. Th ose who have changed jobs several times in the course of their working career can end up with several small, fragmentary pensions that do not add up to an adequate pension. Th e self-employed have grown in numbers. None of the self-employed have access to the second state pension and most are not covered by occupational schemes.

Final salary schemes also provided use-ful survivors’ benefi ts to widows and orphans. Th ere are many widows whose husbands ac-crued entitlement to the pensions they receive, but there will be fewer of these in the future. Defi ned contribution schemes do not usually provide benefi ts for survivors. Th e NPSS is little more than a personal savings scheme. It is not designed to provide survivors’ benefi ts and does little to assist carers. Th e accumulated funds for each member are applied to purchase an annuity at retirement, at rates that are lower for women than for men.

Th e security of women is diminished both by the decline of marriage and the change of emphasis in the pension system. Figure 3 shows that there are now more unmarried women than married, and this has been the case since 2004. Unmarried women cannot claim widow’s benefi ts. Married women are, on average, more than 2 years younger than their husbands. Increased longevity means that loss of marital status, whether as wid-ows and divorcees or as women who never formally married, aff ects more women longer into old age.

Th e proportion of children born out-side marriage continues to rise. Now 40% of children are born outside wedlock and lack of orphans’ benefi ts is one of the disadvantages

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they may suff er, besides the lack of widows’ pensions for their mothers, if they lose their fathers.

Some widows’ pensions have vanished, moreover, as a result of divorce, which has become very common. Figure 4 shows the continuing increase in numbers of divorced people. More than 2 million women remain divorced, notwithstanding a high incidence of remarriage after divorce.

All this means that when the new state pension ages, increased as in the 2007 Act to 68 from 65 for men and women, and the NPSS that the Government is planning to in-troduce in 2012 are in operation the results are likely to be disappointing—for reasons both demographic and economic.

Th e new pensions regime, set up by legislation implementing the 2005 Turner report, assumes economic prosperity and full employment. But this will become less attainable as the population ages. Th e invest-ment returns achieved by the NPSS will be adversely aff ected by a lack of growth in the economy and in corporate profi ts. Th ere will be fewer younger people economically active to drive economic growth. Older people will have to wait longer for their pensions. Th ose who can stay in attractive jobs will work longer. Meanwhile some younger people will be un-employed, waiting for them to retire.

Th e mining and manufacturing industries, which provided breadwinner’s jobs and useful pensions for working men and their families, have declined. Newer service industries have a more feminised workforce with poorer pen-sion provision.

Th e security of women is a particular concern when we consider that marriage rates have declined, divorce rates have increased and women are expected to pay for their own pen-sions from their own earnings. Women suff er more from the phasing out of survivors’ ben-efi ts and they face additional losses in the tran-sition to defi ned contribution schemes because their annuity rates are lower. More generally the current reforms of pensions do not address the social and demographic implications of planning for old age. In pre-industrial so cieties children were a provision for old age. But our pension system is increasingly rewarding women for not having children. Th e decline in the birth rate was far removed from the concerns of Turner’s commission. Th at surely was a mistake. Th at decline is the central threat to the ability of our future society to pay its pensioners.

Carers, whether they care for young children or infi rm adults, are being rewarded only obliquely by a reduction in the 2007 Pensions Act to 30 years of working contri-butions required for full entitlement in the state scheme. Th is change rewards those who work abroad for some years as much as car-ers. Many carers are destined for small state pensions, little or no private pensions and the prospect of claiming means-tested benefi ts in old age within the new regime. Th ey cannot

expect any bonuses or increments within the NPSS. Yet more carers will be needed. Car-ers within the family available to look after those in need will fall short in numbers to an increasing extent.

Th e family context of pensions has been disregarded. In practice couples need to co-ordinate their retirement plans. But our pen-sion system is increasingly treating persons as individuals. Th e Pensions Act 2007 abolishes adult dependency increases in retirement pen-sions. Benefi ts for widows and orphans are seen as out of date and inimical to Turner-style modernisation, yet many widows had little opportunity to pay for pensions of their own during their working lifetime.

Th e deterioration is aggravated by par-ticular weaknesses in the British system, which have not been addressed by the new legis-lation.

In the UK industry-wide and multi- employer schemes are rare. Contracting out leads to smaller state pensions. Early leavers accrue fractional occupational pensions from a succession of jobs. Fragmentary private pen-sions become a nuisance for pension provid-ers and for the recipients who are faced with claiming means-tested benefi ts in old age.

Th e growth in self-employment has major relevance to pensions provision. Other

countries include their self-employed in earnings-related national schemes, as in the USA, and in occupational pension schemes, as in France. Despite the fact that British self-employed are more numerous and this growth in self-employment is linked to poorer pension provision, they received scant attention by the Pensions Commission—possibly because of lack of data. Turner did not see how to bring the self-employed into the NPSS. Nor did the Pensions Commis-sion try to bring them into the second state pension—even though many already pay earnings-related contributions. Employers will continue to use self-employed workers to avoid pension costs and to escape payment of employer’s national insurance contributions. Th at is one reason for the growth in self-employment. Poorer pension provision is the consequence for an increasing number. Com-puter programmers along with salespeople and insurance agents are joining the ranks of the self-employed. Th ey have no occupation-al pension scheme to join nor a trade union to press for one. When the self-employed are counted we could discover an underclass of as many as 10 million poorly provided with pensions. Th ey are not to be auto-enrolled in the NPSS so employers will have a further reason to avoid engaging employees and to use the self-employed instead.

Th e Turner report was an opportunity to make useful and lasting changes to our pen-sions system. Sadly, though, it has not proved adequate to the realities of demographic change. We can expect to pay more in pen-sion contributions than previous generations, but the pensions we can expect are rather less. Th e resulting poverty will be aggravated by the decline in marriage, smaller family sizes with fewer possibilities of caring within the family and the increase in lone person households among the elderly.

References1. Population projections. Government Ac-

tuary’s Department, London.2. Pensions Commission (2005) Second

report of Th e Pensions Commission, Report. Pen-sions Commission, London.

3. Her Majesty’s Government (2008) Pen-sions Bill 2007–2008.

4. Her Majesty’s Government (2007) Pen-sions Act 2007.

Patrick Carroll works for the Pension And Population Research Institute, London.

More pensions to pay, for longer. Fewer, poorer, workers, to pay them. Result: misery.