SCENE SETTER

Political, economic and social change

POLITICS, SOCIAL CHANGE AND ECONOMICS

Nkolika Ezepue
Analyst
Investment Consulting

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Sanam Mehta
Analyst
Investment Consulting

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Russell Wright
Senior Vice President
Defined Contribution

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Iona Young
Analyst
Investment Consulting

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“If only we could take the politics out of pensions” – a sentence often spoken but unlikely to be achieved.

Like every aspect of our financial lives, decisions around pensions and retirement are influenced by the economic and social environment surrounding us, as well as the competing priorities and interests in political debate.

Here we set the scene for the topics that follow, looking at key events that have impacted the UK’s retirement income challenge, including life expectancy changes, the growth of DC pensions and the evolving political backdrop.

We’re living longer and longer
Retirement was once a short period of time. When the first state pension was introduced in 1909 ^[1], men and women who qualified at age 70 could expect to live for around 11 and 13 years respectively. ^[2] Now, life expectancy at 70 is 16 years for men and 18 years for women^[3]; and the chances of living considerably beyond this have improved too.

Of course, there’s a lot to celebrate about living longer, particularly when combined with good health. But in the context of retirement income, it’s the key complicating factor. We’ve analysed UK life expectancy data to see how it’s changed over time, and how it’s expected to improve further in the future^[4].

DC overtakes DB
Increased life expectancies have contributed to the slow demise of DB pension schemes. 2013 saw the percentage of employees invested in DC pensions overtake those in DB pensions ^[5], and this trend is likely to continue. The impact on the retirement income challenge: more uncertainty and responsibility for the retiree.

With people living longer and becoming increasingly reliant on their DC pot, will they have enough savings to fund a comfortable retirement? Projections from the Pensions Policy Institute (PPI) give limited hope. ^[6]The median DC pot for those aged 55 to 64 is expected to grow from £40,000 today to £66,000 in 20 years’ time, which is unlikely to be enough to live on in the absence of other sources of wealth or state benefits.

There’s been a huge focus on promoting retirement saving and the PPI projects the median total DC pension assets in the UK to grow from around £545 billion today to over £1 trillion (£1,032 billion) by 2042.^[7]

The politics of pensions
Rising life expectancies in the 20^th century were a key driver of political change related to pensions. This timeline illustrates some of the key legislative and political events that got us to where we are today. The 21^st century is unlikely to see any slowdown in the pace of politically-led change.

Sources: UK annuity price series, 1957–2002 (E Cannon & I Tonks), Financial History Review (2004) and announcements on gov.uk.

We think it’s worth taking the time to consider how best to help members, rather than prioritising column inches. It’s going to be a challenging period for many people, so we'll need to work together to come up with practical, achievable solutions to make things more manageable.