How do we defuse the pensioner poverty time bomb?
With pensioner poverty rising again, Helen Barnard says politicians must address demographic, housing and pension-saving trends to ensure people live with dignity in later life.
Two of the most impressive policy achievements in recent decades were a halving of pensioner poverty and the Turner Commission’s creation of a new framework for pensions policy. But both are now under serious threat – pensioner poverty is on the rise again, and the Turner Commission’s unfinished business, plus new challenges, are fuelling rising risks for both the state and individuals.
What’s the problem?
In 1994, nearly three in ten (28%) of pensioners lived in poverty, only just below the rate for children (32%) and far higher than the rate for adults without children (17%). By 2012, there had been a revolution in poverty risk. Pensioner poverty had tumbled to just over one in ten (13%), the lowest rate for any group, a third lower than the next lowest rate of 19% among working-age adults without children.
Three factors drove this enormous fall: rising home ownership, higher incomes from private pensions and earnings, and increased state support (especially through Pension Credit).
But since 2015, pensioner poverty has risen again, reaching 18% just before the pandemic, before falling back to 15% during the Covid pandemic. This rise is concerning, but future trends are even more worrying – on our current trajectory, many millions of us face a retirement dominated by hardship, debt, fear and illness.
First, the demographic trends. In 1999, one in six of the UK’s population was over 65. By 2019, it was one in five. By 2050 it’s set to be one in four. There are likely to be about 7.5 million more older people by 2069 than there are today. The fastest increase will be among those over 85, an age group that is expected to more than double over the next 25 years.
As well as ageing, we are also seeing ever-greater numbers of people living with multiple health conditions. And, more people are living alone, particularly concerning since the poverty rate for single pensioners (20%) is nearly double that for couples (11%). That gap won’t necessarily remain constant as new cohorts of pensioners retire, and the current Pension Credit system actually provides somewhat less generous support for couples – set below the poverty line for their family type – than for single pensioners, for whom it is set just above the poverty line. Overall, however, living alone is still likely to increase the risk of financial hardship.
Second, the housing trends. Currently, almost three-quarters of the over-65s own their home outright, up from just over half at the start of the 1990s. But homeownership levels peaked at the start of the 2000s and then declined until around 2016, with only a very small uptick since then. Since the early 1990s the big trend in housing has been the rise in private renting. In 1993, 1 in 10 working-age people rented privately—now it’s a quarter. Private renting is rising in every age group, but the biggest increases are among people aged between 35 and 44. This group is three times more likely to rent than was the case 20 years ago. By contrast, the proportion of people who own with a mortgage has fallen from more than two thirds of 35 to 44 year olds in 1997, to just half in 2017.
Already, 750,000 people over 60 live in private rented housing in England, with the proportion of households headed by older renters having doubled in the last 15 years. This is crucial, because renting pensioners are more than twice as likely to live in poverty compared to those who own their home. If you reach retirement living in a house you own outright, you’re free of the biggest outgoing most of us ever face. Research from the mutual insurer Royal London found that someone who owned their home outright could keep up their living standards with a pension pot of £260,000. If they had to keep paying private rent, they’d need a pot of £445,000 to do the same. As well as creating a looming crisis for many renting pensioners, this will also create ever more pressure on Housing Benefit and raise the cost of that element of the social security system even further.
Third, the pension saving trends. Very few of us are saving enough to provide a decent income in retirement, and many still aren’t saving anything.
Pensions auto-enrolment has been a huge success, raising the proportion of employees saving into a private pension from 32% in 2012 to 75% in 2021. But only about a fifth (19%) of employees overall, and only 1% of low earners are saving enough to give them a good chance of achieving a minimum decent income in retirement.
By contrast, pension saving among self-employed people has collapsed from nearly half (48%) in 1992, to less than a fifth (16%) in 2018. Some may be saving in other ways, for instance through investing in property or through ISAs. However, it is very uncertain how far such methods will provide sufficient income in older age, and more than a third (36%) of self- employed workers, around 1.2 million self-employed of those aged 30 – 64 say they are not saving at all for their retirement.
Inequalities earlier in life are reflected, and sometimes magnified, in retirement. Gender inequality remains a major concern, with women more likely to earn under the threshold for auto-enrolment, as well as missing out on contributions when they are on maternity leave or out of the labour market through caring, meaning they retire with smaller pension pots than men. There are also troubling patterns across different ethnic groups, with people in some ethnic minority groups significantly more likely to report having no pension, and those in all ethnic minority groups more likely to have cut back on pension contributions because of rising cost of living pressures. And disabled people are less likely than non-disabled people to be saving in a pension, and have pension pots worth only a third of the UK average.
How did we get here?
The Turner Commission was established by the 2002 Pensions Green Paper and ran from 2003 to 2005. Its three commissioners represented different constituencies of interest – Lord Adair Turner came from an employer background, Baroness Jeannie Drake was a trade unionist and Professor Sir John Hills a highly respected academic.
The Commission has long been recognised as one of the most successful examples of long-term consensus building around policy in the UK. Its first report in 2004, set out a carefully researched, rigorous analysis of the issues and options for addressing them. Following extensive engagement with experts and the public, its second report laid out a policy framework which was almost entirely adopted by the then Labour government, and continued by subsequent governments.
The Commission identified three central problems which made reform imperative:
- First, private sector pensions were in decline, with Defined Benefit schemes closing and other forms of pension saving failing to fill the void. The proportion of private sector workers relying wholly on the state pension had risen from 46% in 1995 to 54% in 2004. The proportion of the population over 65 was expected to double by 2050, increasing pressure on the state pension, and 60% of employees over 35 were set to retire with inadequate pensions.
- Second, individuals were clearly not going to voluntarily save enough to reverse these trends. The Commission’s research suggested that only about 0.5% of people made decisions about pension saving on the kind of ‘rational’ basis economists used to model behaviour. Compulsion and inertia were the only plausible routes to the necessary step change in saving behaviour.
- Third, it was impossible for small and medium sized businesses to offer pensions without incurring unacceptably high administration fees, so their workers had no access to workplace pension schemes.
The Turner Commission laid out a plan with three main components.
The first was the most political risky – extending working lives. The Commission called for a state pension age equalised between men and women and rising as life expectancy increased. It envisaged a gradual rise to 67 - 69 by 2050. Later governments accelerated this with the pension age for both men and women increasing to 66 in 2020 and due to reach 67 by 2028.
Second, a long-term shift to a flat-rate, earnings linked, fairly universal state pension. This was also later accelerated, with a new single state pension replacing the previous basic and second state pensions for people reaching pension age from 2016. In 2022/23, the new state pension was worth around 31% of average earnings. It provides an income above the poverty line for those without housing costs and will gradually reduce the need for means tested top ups such as Pension Credit. However, it remains below the income level believed by the public to be an acceptable minimum and is low by international standards.
The addition of the ‘triple lock’ has raised the State Pension much faster than would have been the case if it had only been linked to earnings and inflation. This may be a reasonable goal, but the triple lock remains a bizarre mechanism to achieve it, since volatility in either earnings or prices leads to a permanently higher state pension compared to more stable trends, as explained in this excellent twitter thread. Originally intended as a temporary measure to increase the overall level of state pension support, it has taken on a symbolic status and proved exceedingly challenging for politicians of any party to advocate changing.
The third plank of the Turner Commission’s policy prescription was a new workplace pension regime. Contributions would be compulsory for employers and employees would be automatically enrolled (with the ability to opt out) once they earned enough, as long as they were over 21 and had worked for an employer for more than three months. Contributions would total 8% of earnings (over a certain level), with 5% coming from employees and 3% from employers.
This broad framework was implemented, but with a very different approach to delivery than that proposed by the Commission. The Commission intended a single, state-run provider for auto-enrolment. Instead, the Government opted for a market-led approach, with multiple providers for employers to choose between, as well as a state provider – Nest - which is large but not dominant or market-shaping. The result is that many workers end up with multiple small pension pots spread across different schemes and no way to easily consolidate them.
The Turner Commission’s proposals were an enormous advance on the situation in 2004. However, they left some important issues untouched and made some assumptions which turned out to be unfounded. These weaknesses, along with the policy choices of successive governments, and changed global and domestic circumstances, mean we urgently need to revisit the basis of our pension provision.
How do we fix it?
There are six policy challenges which need to be addressed to ensure people can achieve economic security in retirement. Several of these will be tackled by the new Pensions Review, starting in April, led by the Institute for Fiscal Studies, in partnership with the abrdn Financial Fairness Trust. Others will require thinking that ranges beyond pensions policy, addressing deep seated questions about the very structure of our economy and the future shape of society.
1. Boosting saving levels
The Turner Commission assumed that auto-enrolment would create a baseline and individuals and employers would voluntarily choose to increase savings. However, very few low or middle earners choose to save more than the minimum, or believe they need to. Employers are somewhat more likely to go further than they are obliged to, with a fair number who enrol workers they aren’t obliged to include, and some who pay above minimum contributions. However this tends to benefit high earners more than those on lower wages and is not widespread enough to address the problem of inadequate retirement incomes.
One proposed solution are new ‘Living Pensions’, developed by the Resolution Foundation, abrdn Financial Fairness Trust and Living Wage Foundation and now being trialled on a voluntary basis. They have calculated the additional saving required to enable today’s workers to retire with an income meeting the publicly agreed level for a minimum decent income. They concluded that on average, contribution rates need to double from 8% to 16% of earnings on average – the necessary level of contributions depends of course on what age a worker starts saving for retirement. There are obviously multiple ways this can be achieved, balancing individual, employer and state contributions. Organisations such as the Fabians, as well as those driving the Living Pension movement, argue strongly that higher employer contributions should play the greatest role, in part to avoid raising opt-out rates among workers for whom higher contributions would be unaffordable.
For individuals, there are also questions about when additional saving is most appropriate. Analysis by the Institute for Fiscal Studies found it makes most sense for graduates to increase pension saving once their student loan payments cease and for workers more broadly to save more in the second half of their working lives as their earnings are likely to be higher and children to have grown up.
Living pensions are aimed at ensuring a minimum standard of living, reducing poverty and financial hardship in later life. They do not address the issue of replacement rates – what proportion of someone’s previous earnings should they aim to retire on. The Turner Commission assumed a target of a 67% replacement rate for a median earner, with a higher target for low earners and a lower one for higher earners. That 67% target was intended to be met by the state pension being set at 30% of median earnings with the rest coming from a combination of individual and employer contributions to private pensions made through auto-enrolment and voluntary top ups. The Commission was keen, however, to preserve the “diversity of individual preferences”, rather than compelling everyone to save for an adequate pension, or have the state provide the ideal replacement rate for everyone. The Commission instead aimed for what it called a “base load” of earnings replacement, with the state providing 30% and auto-enrolment contributions around 15%, with the capacity for individuals to make up the rest themselves or choose not to.
The issue of what replacement rate we should aim for and how it should be made up is beyond the scope of a discussion focused on pensioner poverty. However, it is certainly ripe for renewed public discussion and a more explicit policy approach.
2. Broadening pension saving
The absence of a serious plan to support pension saving among self-employed people was a striking gap in the Turner Commission’s proposals. The report merely recommended that self-employed people should be able to join the new auto-enrolment pension scheme on a voluntary basis. The new state pension provides significantly better protection than the previous system, but very large numbers of self-employed people are still likely to be left with inadequate retirement incomes. This has been acknowledged by governments over the years, but without leading to action. Recent proposals by the Fabians suggest a new approach, with a form of auto-enrolment linked to forthcoming digital tax reporting and with the incentive of a government ‘pension bonus’ of 3% for every 5% saved.
Extending the scope of auto-enrolment among employees is also necessary. Following a 2017 review, the Government promised to reduce the eligibility age from 22 to 18 and deduct contributions from all earnings (rather than only earnings above £6,240) by the ‘mid 2020s’, however these changes have not yet been made nor has a specific timescale been agreed upon for their implementation. Other changes that have been proposed include increasing the maximum age of auto-enrolment, reducing the earnings threshold for auto-enrolment and requiring it earlier than the current three month employment period. These changes would potentially contribute to narrowing the gender pension gap, as women are more likely to earn below the current threshold for auto-enrolment and pay contributions on a smaller proportion of their earnings.
The Government should also clarify the legal position of workers who are not employees and take steps to extend pension provision to everyone who has an employer under tax law, even if they are not employees under employment law. In addition, the Pensions Policy Institute have examined reforms which would pay pension contributions on behalf of those who currently miss out because they are caring for children, disabled or older people. Again, these would help to narrow the gender pension gap since carers are still disproportionately female.
3. Addressing housing costs
The Turner Commission discussed housing assets - the extent to which they could be expected to contribute to retirement incomes and the fact that homeownership had reached 70% among 70 to 80 year olds at the time. However, it made no mention of those who would continue to rent into retirement, and no recommendations for how these rents should be accommodated. The Commission was of course unaware that their report was to be published at the peak of homeownership, and that rates would subsequently decline.
Spreading pension saving and boosting the amount people save will help. But there also need to be additional steps to address housing costs specifically. In the short term, support within the social security system for renting pensioners must be improved. This is important for low-income renters more broadly but is especially vital in the context of holding down pensioner poverty and preventing the damage done to the health and well-being of older people by poor quality, unaffordable homes and financial hardship.
However, more fundamentally, we need to redesign the UK’s dysfunctional housing market so that it provides affordable homes at every stage of life and enables far more people to build up assets, which can then reduce the numbers renting into retirement. Setting out how to achieve this shift is an important focus for JRF’s housing work.
With a focus on pensioner poverty, we also need to increase the supply of homes designed to be suitable for the later part of our lives (and for the growing numbers of younger people also living with multiple health conditions). Research for the NHS suggests more than 750,000 extra specialist homes will be needed by 2035.
4. Extending working lives and managing health inequalities
The Turner Commission’s proposals were predicated on continued increases in life expectancy, matched by rises in the state pension age and the extension of working lives. However, we now face a range of inequalities which make it extremely difficult to design an equitable approach to pensions and make the politics of selling such an approach particularly fraught. This is especially true because we need to grapple with inequalities within groups as well as between them.
Overall, pensioners as a group are better off in terms of both income and wealth when compared with the working-age population. That makes it difficult to make a credible case for devoting greater resources towards them. But there are stark inequalities between different groups of pensioners. Similarly, when we look ahead to future cohorts of pensioners, some will retire with even greater wealth, having inherited their parents’ homes (and second homes) and also benefited from parental support through their working lives meaning that they already have good incomes and significant wealth. Politically, policies aimed at tapping into the accumulated wealth of current and future pensioners tend to meet strong resistance. Multiple generations are often very protective not only of their current wealth and security but of their right to pass this on or to inherit it. By contrast, different groups of pensioners are likely to have experienced low incomes and poor health through their working lives, been unable to build up housing or other wealth and will have little to inherit.
Inequalities in health and life expectancies create even greater obstacles to designing a system that is equitable, affordable and politically saleable.
For those born in 2004, life expectancy was 77 for men and 81 for women, having risen for most of the previous 200 years (apart from during world wars). By 2012 it was 79 for men and 83 for women. But then the trend changed, remaining fairly level for several years, before falling sharply in 2020 and then appearing to continue to level again.
The success and sustainability of our current pension framework relies on people working into their sixth decade, and eventually into their seventh. But the feasibility of this is called into question by our difficulty in keeping even workers in the 50s in the labour market. The gap between the employment rate of those aged 50 – 64 and those aged 35 – 49 has narrowed since the 1980s but still stood at 13 percentage points in 2020.
Health is a crucial element of this. Healthy life expectancy has never kept pace with overall life expectancy. In 2018-20, disability-free life expectancy was almost two decades lower than life expectancy – only 62 years for men and 60 for women. Becoming disabled or developing a health condition should not necessarily shut people out of work of course, but the UK has a poor record on enabling disabled people of any age to access suitable work. Since the pandemic, big rises in inactivity have held back the UK’s recovery, with the key underlying issue being rising numbers of people being out of the labour market due to long-term ill health. Addressing economic inactivity and ill health will be a central focus for JRF in the coming months.
A further challenge arises from the stark and growing problem of health inequalities. In 2018-2020, men in the most deprived areas of England could expect to live to 74, but only healthily to 52. By contrast, men in the least deprived places could expect to live to 83, and to be in good health until 71. For women, those in the least deprived areas could expect to live eight years longer than those in the most deprived places, and to enjoy 19 additional years of good health. Rather than improving, these gaps have actually widened since 2011.
This makes it far harder to design an equitable pension system. Many workers on low incomes pay tax and national insurance to fund a more generous state pension which they have little hope of benefiting from for long, if at all. Addressing working age poverty which drives so many health inequalities is the real answer to this. But in the meantime, we need a more equitable system.
The problem has become starker due to reductions in the adequacy of the working age benefit system, creating a much sharper cliff edge between the experiences of those in their late 50s and early sixties, and those who have passed the new state pension age. It is hard to see how it can be either fair or effective, especially in relation to people in poor health, to maintain the cliff edge separating those just under state pension age - subject to a system of low benefits and stringent conditionality - and those just over it - suddenly shifted into a system with much higher benefits and no conditionality.
These inequalities create two dilemmas for policy. First, how quickly to increase the state pension age in the context of significant and potentially growing inequalities in health and life expectancy. Ideally, we should aim to achieve high labour market participation up to any existing state pension age before it increases again. Second, how to support those who are unable to work up to pension age, or who can work in far more limited jobs and hours. Policy needs the ability to recognise that people in their early sixties are not the same as those in their thirties or forties. But it must do so without creating incentives for people who could keep working to leave the labour market early - which would reduce their pension contributions as well as their current income, might mean they access their private pension early and run out of money later, and increase the cost of the state pension system.
Organisations including the Fabians and Phoenix Insights are therefore examining options for more generous support and greater leeway in relation to work and conditionality for older people in poor health for the last few years before they can access the state pension. Others are considering the merits of giving some people earlier access to their pension, for instance if they left education or started work earlier.
5. Fixing decumulation – how people draw down pension savings
Most private pensions are now Defined Contribution rather than Defined Benefit, meaning that the income they provide is determined by the amount people save, how it is invested and how and when they choose to access it.
One consequence of the market approach taken by successive governments is that many people end up with multiple small pension pots, accumulated as they move from job to job. This raises the costs associated with administering their pensions and makes it far harder for individuals to understand their options and make active choices about how their money is invested and how they use it. Consolidating these small pots into single pensions should therefore be a priority for the government and industry. Indeed, in 2021, the Pensions and Lifetimes Savings Association and Association of British Insurers jointly convened the Small Pots Co-ordination Group which is developing proposals for administrative and regulatory steps to advance consolidation.
However, this is only a small element of the issues that need to be addressed in relation to how and when people draw down their pension savings. The fundamental choice facing savers is whether to use their pension pots to provide a lifetime income in retirement (whether through the old route of an annuity or more modern and flexible products) or to take some or all their savings out as cash.
Consumers always had the option to take some of their pension savings as cash, but the introduction of ‘Pension Freedoms’ in 2014 allowed those aged 55 or over to take out their entire pot straightaway. The benefits of this were clear for people with another pension or income source for retirement, and with access to high quality, financial advice. However, it significantly increased the risk that many would leave themselves without an adequate income in retirement, and that this would be especially problematic for those on low incomes who might already be facing retirement with an inadequate income and exacerbate it by withdrawing cash to cope with immediate living costs or debts.
Currently, more than half of Defined Contribution pension pots are cashed out the first time people gain access to them. Another third withdraw a lump sum but not the whole amount. Even among those making multiple withdrawals over time, most are doing so fairly quickly. This might be the right choice if they have other assets or future income, but it raises the prospect of at least some people exhausting their savings quickly and being left without provision for a steady retirement income. This pattern also poses challenges in relation to investment strategies in the years leading up to pension pots becoming available, since different approaches are suitable for those who will withdraw all or most of their pots quickly compared with those who want to turn them into a longer-term income.
Improving access to financial advice has long been promised as the solution to this risk. However, many argue this over-estimates the extent to which large numbers of people will ever want or feel able to actively engage with the detail of such decisions, let alone be equipped to make realistic judgements about their own longevity and future needs. Research shows that consumers feel ‘confused and overwhelmed’ with high levels of uncertainty about decisions on withdrawals, leading to worse outcomes for those on low incomes especially. It seems likely to be necessary to put more constraints around how soon people can withdraw their savings and create default options which will guide those who do not actively engage or access advice towards options offering a lifetime income, as recommended by the Fabians and others. This would also help avoid the other risk, of people accessing savings too slowly, living too frugally, perhaps even dying sooner than necessary, to preserve savings for their own later life or to pass on to loved ones.
6. Improving tax and social security
When it comes to social security, the single biggest step to reduce poverty among today’s pensioners is increasing take-up of the means-tested Pension Credit, which has been stuck below 66% for the last decade. Independent Age estimates that around 850,000 eligible pensioners are missing out (meaning that they lose other support with medical costs, heating, the TV licence and cost of living payments). Increasing take-up could free more than 400,000 pensioners from poverty. Their research also suggests that low take-up of Pension Credit creates costs elsewhere, increasing NHS and social care spending by £4 billion a year. Over time, Pension Credit will become less important as more people retire on the new state pension and no longer need the means-tested top up. In the short-term, increasing take up should be a high priority, with organisations such as Policy in Practice demonstrating how effective action can be taken at local as well as national level. Many also propose longer-term progress towards Pension Credit being paid automatically, and perhaps integrated with Housing Benefit and Council Tax Support, rather than people having to actively apply for them.
Tax is a much thornier issue. Private pensions form the largest block of wealth in the country, outstripping even housing. But the tax regime for it is, in the words of Paul Johnson of the Institute for Fiscal Studies “An unholy mess and a costly, unfair, complex and distortionary mess at that”. It is regressive because those with higher earnings, Defined Benefit pensions and larger employer contributions are treated more generously than lower earners, those with Defined Contribution pensions and with lower employer contribution. Its design is incredibly complex and, to the extent anyone understands it well enough for it to affect their behaviour, creates perverse incentives. The ability to withdraw a quarter of a pension pot tax free, having put the money in from pre-tax income, is particularly valuable for those with bigger pension pots, and even more so if they have large enough incomes to pay higher rate tax as pensioners. For those with savvy financial advice, pensions are a very efficient way to avoid inheritance tax, since they can be passed on tax-free if you die before 75 and recipients don’t have to pay inheritance tax on them.
The Institute for Fiscal Studies recently proposed a package of reforms which would create a simpler, more rational system, with greater equity and clearer encouragement for pension saving, especially for those on lower incomes. The howls of protest that greeted even this careful and moderate proposal demonstrated how politically fraught any changes may be. Policymakers must, however, overcome this barrier to place the pension system on a more sustainable basis. They might, perhaps, take inspiration from the consensus created by the Turner Commission twenty years ago, which successfully depoliticised some equally highly charged issues.
But what about the really big questions?
Finally, when it comes to pensions, there are two enormous elephants in the room.
The first is risk. Pension policy is all about risk sharing. We all face the risk that we won’t save enough during our working lives to enable us to live with dignity in retirement. We don’t know how long we will live, so could end up saving too much (depressing our living standards earlier in life) or too little. We don’t know what health conditions we will have in later life. We might die early, or we might face high health related costs. We don’t know how prices will change or how different kinds of investments will perform over time. Because of all these uncertainties, modern societies have found ways to collectivise these risks. We share the risks across the whole population by paying tax and national insurance to fund the state pension and other benefits and services. We share the risk with our employer and fellow employees through workplace pension schemes. But the shift from Defined Benefit to Defined Contribution pension schemes represented perhaps the most striking de-collectivisation of risk of modern times.
In a system of Defined Benefit pension schemes, the employer shoulders the largest part of these risks. Employees pay in a set amount of their wages and are guaranteed a set income level in retirement, regardless of whether their contributions were sufficient to support that income level. Under a Defined Contribution scheme, the employer, like the employee, pays in a set amount, without any responsibility for the income eventually received by the employee on retirement. Two risks are therefore shifted onto the individual employee: the ‘longevity risk’ (not knowing how long they will live) and the ‘investment risk’ (having to make decisions about the best investment strategies for their accumulated savings, especially in the years leading up to retirement. The state also shoulders greater risk as it underwrites both a basic standard of living through the state pension and steps in when workplace pensions fail.
Recently, Collective Defined Contribution (CDC) pensions have been proposed as a way to reintroduce greater risk sharing. These have been tried in the Netherlands, Denmark and Canada and in 2021 UK legislation was passed to allow the Royal Mail to launch the first UK version. CDC pensions do not guarantee a pension income, but they have a target pension income, which can be increased or decreased if the scheme finds itself over or underfunded. They are considered more sustainable because risks are shared across a large group of individuals, and they have a steady stream of people paying in as well as drawing down savings. They can be particularly helpful in helping employees manage the ‘investment risk’ – keeping the right balance between maximising return and investing in safer assets as people approach retirement age. However, they do not shift any of the risk back to employers, who continue to be responsible only for making contributions.
Most experts and commentators assume that this is the best that can be hoped for, with Defined Benefit schemes seen as impractical and unaffordable. This view is reinforced by the financial pressures experienced by many employers struggling to service the costs of now-closed Defined Benefit schemes, starkly illustrated by the striking charts shared in this twitter thread. These charts also show that employees are contributing more than ever to pension schemes (mainly Defined Contribution), whilst employers’ contributions are overwhelmingly still going into Defined Benefit schemes, despite there being three times more members in Defined Contribution schemes.
However, others argue that the unaffordable costs of these schemes arise from the very fact that they are closed and therefore do not have on-going contributions to sustain them. Such commentators seek a revival of a revamped Defined Benefit model, to rebalance risk sharing and reintroduce a greater role for employers.
This issue of risk sharing arises just as starkly of course in the parallel question of social care policy. It is also bedevilled by the challenges of managing multiple inequalities which hamper the creation of a policy which achieves equity, affordability and political credibility.
The second question is one of population. Demographers refer to the replacement fertility rate – the average number of children needing to be born to sustain a nation’s population. In the UK, we would need 2.08 children on average per woman for the long-term replacement of the population. In 2021, the rate was 1.61 children, having declined every year since 2012. This is a common pattern across the OECD, with fertility having fallen on average by 44% between 1970 and 2020. A declining population may not be problematic in itself, but it critically undermines the financial sustainability of a state in which a larger and larger proportion of people rely on pensions and public services paid for by a shrinking workforce.
In January 2023, Japan’s Prime Minister issued a dire warning, saying that the country is “on the verge of whether we can continue to function as a society” due to its falling birth rate. Japan has both one of the highest life expectancies in the world, and one of the lowest birth-rates, at 1.3 children per woman. South Korea is even closer to the brink, with a birth-rate of only 0.79, offering a window into the future for many other countries.
Increasing fertility, in the UK as elsewhere, would require action on multiple fronts. Enabling family formation by making homes more affordable. Reducing the cost and increasing the quality and accessibility of childcare (for more on how to do this, follow JRF’s work on the care economy). Creating greater equality between fathers and mothers in caring for children. Reducing the earnings and career penalty paid by parents, especially mothers. All of which would be positive steps for many other reasons as well of course.
But the other way to avoid demographic crisis is to increase migration. From the point of view of sustainability and the future of the planet, spreading the existing population more evenly around the world might more desirable than trying to increase fertility in countries already consuming more than their fair share of planetary resources. But if Paul Johnson thought the response to the IFS’s pension tax proposals constituted a ‘wall of opprobrium’, just wait until they publish a report showing how much the UK should aim to increase migration to pay for all our pensions.
Sooner or later though, politicians will have to level with the public: either we drastically downgrade our expectations of the lifestyle we can expect in older age, or we take serious action to increase fertility, or we ramp up immigration. There is no short-term political gain from presenting the public with this unpalatable reality. But there is an ocean of long-term pain to come if we keep ducking it.