11 January 2002 - 13 January 2002

Ageing populations in developed countries: implications for pension provision

Chair: Mr Jonathan Bloomer

(In association with Prudential plc)

Our first conference of 2002 was held over the weekend of 11-13 January, with Prudential as our partners, to consider the increasingly urgent problem of pension provision for ageing populations in developed countries. We were able to draw on the experience of participants from a number of countries and from different disciplines. This served to emphasise a point to which we frequently returned in the course of our discussions - the strength of national culture, history and tradition in forming attitudes towards pensions.

We looked at the problem from the point of view of Governments, pension providers and consumers. But before looking in detail at the policy issues, we examined some of the general factors behind the ageing problem. This underlined the diversity of opinions and analyses.

One participant argued that of all the pressures on social security programmes, ageing was the biggest. Another maintained that the decline in fertility was the most important factor. Given its present state of fertility, Italy, for example, by 2050 would need 80% of its population to come from immigration to maintain its present level. It was thought that many of our problems with pension provision stemmed from the fact that there was a lack of clarity about the fundamental objectives of the underlying policy. Pensions had originally been introduced in the UK for those reaching 70 and over, at that time a small percentage of the population. Was the objective to be redistributive or mainly to provide a safety-net for those who might have been unable to provide for their extreme old age? In France, we were told, pensions were considered to be a continuation of the wages earned during a working life. Redistribution was a matter for the taxation system.

Politicians came in for a fair amount of criticism for changing pension systems to suit their own short term political goals. One participant described this process as the rate of growth of politicians promises exceeding the rate of growth of GDP. There was some support for raising the age at which State pensions might be drawn. But we were warned of confusing the retirement age with the pensionable age. Governments needed to bear in mind that they could only control the latter.

The difficulties for politicians were, however, also acknowledged. All of the options were unpopular. Raising taxes was never welcome to the electorate. Cutting benefits carried an increasing political risk given the growing proportion of pensioners in all developed countries. Raising the retirement age would send the clearest signal of a change of direction but was probably the most unpopular move of all. Against this it was argued that if womens' pension age was being increased in the UK to match that of men, why could not the next step be to raise both by a few years. But the great circumspection of the US Congress in moving the pension age by two years over the period to 2030 showed the political problems of taking such action. In addition we were told of the enormous transition costs incurred in any fundamental reform of pensions arrangements.

Most of us were agreed on the need for flexibility in designing pension plans. We also agreed that one of the biggest difficulties was the abrupt change between being in work and living on a pension - "going over the cliff edge". If pensions could be brought in gradually might it not be possible to persuade people to work longer? Finally we were warned that many of the concerns about unemployment which shaped our current attitudes to pensions would be allayed by the fact that we were moving from a position where unemployment was the major challenge, to a world where scarcity of labour in developed countries would be the biggest problem. Involuntary unemployment would, in theory, be a thing of the past.

Against this general background we looked at pensions from the point of view of the consumer. Our first conclusion was that it would be a mistake to assume that all consumers were alike. Their choices were circumscribed by their position in the labour market, education to enable them to understand the options available, and many other factors. Their expectations were equally diverse. We were told that "Generation X" of relatively young workers had quite different expectations from their parents. Some did not trust the state to provide for them and therefore saw little reason to contribute to a state pension scheme. Others would be reluctant to lower their standard of living when they retired - holidays in the Sun could not be dropped.

Expectations, needs and desires should be more thoroughly researched to find out what people really wanted. The idea that a prolonged period of publicly funded leisure at the end of a working life, was a right, was a relatively recent phenomenon. It was suggested that the State should take care of "needs" and that the individual should provide for his or her "wants" but we acknowledged that it would be difficult to get a commonly agreed definition of either of these two terms.

In terms of policy recommendations there was a call for more information about current and future consumers, and for Governments and Providers of pensions to base their policies on what consumers wanted rather than on what it was thought they should have. In terms of later life, a distinction was drawn between those who might still be physically young and active and those further towards the end of their lives who would probably need additional care. Might pension policies and plans be directed towards the second category? This led to the suggestion that pension planning should take account of the entire life course of an individual and the need to fit into it education, further retraining, family commitments and leisure. If this were done, perhaps people could be persuaded to continue working later into their lives. As one participant pointed out, we were currently staying longer in education, retiring earlier and living longer.

Other recommendations from the consumer's point of view were the need for education and raising awareness of future needs. We were told that this lay at the heart of the recent German pension reform where, on a monthly basis, each citizen received a notice which set out how much he or she had contributed to their pension from their salary, how much had been contributed by their employer, how much by the state. They were also given a forecast of what the result of such a level of contribution would be at retirement age at either of two different levels of inflation. It was thought that financial regulation, although intended to protect the consumer had had the effect of making the system extremely complex. Very few ordinary people were thought to have either the time or knowledge to be able to find their way through the small print of most pension products.

Finally there was a plea to look again at the relationship between employers and employees. The employers currently occupied an important position in their roles as work providers, facilitators of pensions and other products and, particularly in defined benefit schemes, providers of pensions. We noted that if employers were overburdened by direction and regulations they might no longer be willing to take this on and, at the other end of the spectrum, many more people were self employed and responsible for making their own pension decisions. We speculated whether such people might be persuaded to join larger pools of similar workers to obtain economies of scale and other benefits.

We attempted to define the objectives of any pension scheme and came up with some guidelines. It should, inter alia, be universal and provide an "adequate" (a word we would come back to) income and be sustainable over changes in demography. Pension funds would support economic growth, and if possible encourage discretionary saving. To meet these objectives, some of us elaborated a three-legged model. The first level would consist of a basic state pension equal to 25% of national average income. This would not be means tested. The second level would top-up the first to a level of 40% of average income. People would be encouraged to contribute to this through a "negative tax incentive" where the individual would pay reduced tax if they contributed to the scheme. Finally, for those who wished to increase their pensions or include other aspects of their retirement, there might be a third tier of product to which they could contribute which would be more lightly regulated than the first two. The second level product was intended to encourage more people to save more. In this context we noted that with the decline in defined benefit schemes and the move to defined contribution plans, the actual amounts saved were declining. Importantly this second-level product would be portable between jobs.

We spent some time discussing the merits of compulsion. Some among us thought compulsion was undesirable on libertarian grounds. Others argued that an element of compulsion existed already in that, in most developed countries, citizens were obliged to contribute to the state pension and to extend compulsion further to require people to make some additional savings would not be objectionable in principle. Those who subscribed to this view thought the second level product should be made compulsory. We also considered the possibility of developing a single EU market for pension products. This would have the advantage of creating supra-national pension providers who would benefit from economies of scale. We saw advantage in a system where the retail and fund management functions were separated. Given the element of compulsion inherent in this scheme we discussed the possibility of "taking pensions out of politics". If we could have a Monetary Policy Committee why could we not have a "Pensions Policy Committee"? The politicians among us thought this impractical in an absolute sense. Pensions were a claim on future resources and as such would always attract strong views among the electorate. It was the job of the politicians to give voice to such views. It might be possible, however, to put some functions of pension policy into a non-governmental body. It might also be possible, as in Ireland, to achieve a high degree of consensus between the political parties on the long-term aims of national pension policy.

Looked at from the perspective of Government we thought that Governments did indeed have a broad role in providing a transparent universal pension and also to act as a regulator of the private market even though the level of such regulation might be reduced for benefits above the universal level. Government also had an important role in ensuring that contributors had a realistic view of the future patterns of work and retirement which would in turn form their expectations. While the concept of risk was difficult for many people it was likely that trust in any system over the long term would be enhanced if it were transparent, simple and stable. With these and other factors in mind some of us elaborated a scheme in which Governments would provide a national universal pension that was "sufficient" which should be defined if possible by political consensus. This pension might begin at 65 and be paid at the level of 35% of national average earnings for anyone with a full employment record. (We noted that in Germany the level was 67% of a contributors lifetime earnings.) It would be inflation-proofed preferably by indexing it to net wages rather than prices. There would be a transitional pension for those like carers with a significantly depleted employment record. This pension would be provided out of tax or national insurance and there would be no opting out. It was thought that, if such a pension was introduced, regulation of the market could be simplified even though significant elements of regulation would still be needed to provide the prudential regulation of the providers, avoidance of tax abuse etc. We accepted, however, that if existing schemes continued and were not replaced by or subsumed into the new scheme then tighter regulatory regimes would need to continue.

In reflecting on these various proposals we noted a number of common elements. We agreed that we could not indefinitely continue with our present policies. Indeed one participant drew attention to the danger of society being divided on age lines with the older generation demanding more from the younger generation than they might be willing to contribute. We also agreed that a good deal could be learned from the experience of other countries. It would be interesting to see how the Canadian or Irish experiments which involved a degree of reliance on private capital markets would work out. In a final reflection we acknowledged that we had not come up with a universal solution but since the problem had existed for over a hundred years that was never likely in the course of a weekend's discussions. We nevertheless thought that some of the ideas that had been put forward deserved further study and might assist policy makers. There was a suggestion that another conference at Ditchley might help?

I would like to express my thanks to the Chairman, Jonathan Bloomer, for his expert and impartial direction of our discussions; to Prudential for working with us on the conference and for their support for it. Finally, my thanks go to the participants for their contributions both factual and musical which helped make this such an enjoyable and stimulating conference.

This report reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression.


Chairman: Mr Jonathan Bloomer
CEO, Prudential plc

Mr David Harris

Consultant, Watson Wyatt Worldwide

Mr John R Gardner

Sun Life of Canada, Montreal (1961-96): Vice President and Actuary for the United States; Vice President Group & Pensions for Canada; General Manager for Canada; President (1986-96)
Mr Malcolm P Hamilton
Principal, William M Mercer Limited; Fellow: Canadian Institute of Actuaries; Society of Actuaries
Dr Susan A McDaniel
Professor of Sociology, University of Alberta; Fellow, Royal Society of Canada; President, Canadian Sociology and Anthropology Association
Mr William B P Robson
Director of Research, C D Howe Institute; Canadian Liaison Officer, British-North American Committee EFRP
Mr Alan Pickering
Chairman, European Federation for Retirement Provision, and Partner, Watson Wyatt Partners, Actuaries and Consultants

Mr Simon Colboc

Head of Country, Prudential Europe
Professor Florence Legros
Deputy Director, Centre d'Etudes Prospectives et d'Informations Internationales, Paris; Professor, University of Paris-Dauphine

Dr Josef van Almsick

Director, Federal Ministry of Labour and Social Affairs

Ms Anne Maher

Chief Executive, The Pensions Board, Ireland; member: Accountancy Foundation Review Board; Irish Representative, EU Pensions Forum

Mr Brian Arrighi

Head of Group Policy Development, Prudential plc
Mr Allan Asher
Director, Campaigns & Corporate Communications, The Consumers Association
Mr Jerry Barnfield
Director of Pensions Development, Norwich Union
Mr Philip Broadley
Group Finance Director, Prudential plc
Mr David Coleman
Reader in Demography, Department of Social Policy and Social Work, University of Oxford
Mr Jonathan Cunliffe
Managing Director, Financial Regulation Industry, HM Treasury
Ms Geraldine Davies
Director of Corporate Relations, Prudential plc
The Rt Hon Frank Field MP
Member, House of Commons (Labour), Birkenhead; Chairman, House of Commons Select Committee on Social Security
Mrs Mary Francis
Director General, Association of British Insurers; non-executive Director, Bank of England
Mr Paul Gray CB
Managing Director, Pensions & Disability, Department for Work and Pensions
Dr Sarah Harper
Director, Oxford Institute of Ageing
Mrs Deirdre Hutton CBE
Chairman, National Consumer Council; Non-Executive Director, Financial Services Authority: Chairman, Personal Investment Authority Ombudsman Bureau
Sir Martin Jacomb
Chairman: British Council; Chairman, Prudential Corporation (1995-2000); Director, Delta plc
Mr Damian Leeson
Director of Public Affairs, Prudential plc
Dr Oonagh McDonald CBE
Research and management consultant; Visiting Fellow, International Institute of Banking and Financial Services, University of Leeds
Mr John McTernan
Lately Chief of Staff to Scottish First Minister; Consultant
Mr James Purnell MP
Member of Parliament (Labour), Stalybridge and Hyde; member, House of Commons Work and Pensions Select Committee
Mr Jim Stretton
Lately Chief Executive of UK Operations, Standard Life
Mr Peter Thompson
Chairman, National Association of Pension Funds
Mr Paul Thornton
Senior Partner, Watson Wyatt Partners, Actuaries and Consultants
Mr Nicholas Timmins
Public Policy Editor, Financial Times
Mr Chris Wales
Member of Council of Economic Advisers, HM Treasury
Mr Steve Webb MP
Member of Parliament (Liberal Democrat) for Northavon; Frontbench Spokesman for Work and Pensions
Mr David Willetts MP
Shadow Secretary of State for Social Security (1999-); Member of Parliament (Conservative), Havant
Mr David Yeandle
Deputy Director of Employment Policy, Engineering Employers Federation
Mr Andrew Young
Deputy Government Actuary

Mr Francis Finlay

Chairman and Chief Executive Officer, Clay Finlay Inc
Mr Paul S Hewitt
Project Director, Global Aging Initiative, Center for Strategic & International Studies, Washington DC
Mr David C John
Senior Policy Analyst, The Heritage Foundation, Washington DC
Mr Todd Petersen
Chief Executive, HelpAge International
Mr Stanford G Ross
Partner, Arnold & Porter, Washington DC; Chairman, Social Security Advisory Board on pension and income protection issues