As demographic changes continue to reshape the workforce, pension scheme design and management must adapt to meet the evolving needs of employees and employers alike. With people living longer, declining birth rates, and an increase in the gig-economy, pension schemes need to keep pace with these challenges. We explore the impact of these shift on pension scheme design and management.
Life Expectancy
One of the most significant demographic changes affecting pension schemes is the increase in life expectancy. People are living longer, and this means they are spending more time in retirement. According to the Office for National Statistics, a man aged 65 in 2020 in the UK can expect to live to 84.7 years old, and a woman aged 65 can expect to live to 87 years old.
Firstly, this presents a challenge because pensions need to be paid out for longer periods. This puts pressure on pension funds to generate sufficient returns to support retirees for extended periods. As a result, many pension schemes may have to rethink their investment strategies and consider more diverse portfolios, including alternative investments such as private equity and infrastructure.
Secondly, the rise in life expectancy has led to changes in the way pensions are structured. Many companies have moved away from defined benefit pension schemes, which promise a set level of retirement income based on years of service and final salary. Instead, they have adopted defined contribution schemes, which allow employees to build up a pension pot based on their contributions and investment returns.
Birth Rate Decline
The UK has also seen a significant decline in birth rates in recent decades, with the birth rate falling to its lowest level ever recorded in 2020. For the coming generations, this presents a problem as fewer children mean fewer workers to support an aging population and to replace those who are retiring. This can put pressure on the pension system as there are fewer contributors to the scheme.
One way that pensions have adapted to this demographic shift is by increasing the retirement age. For example, the state pension age is anticipated to rise to 67 between 2026-2028. By keeping people in work for longer, pension funds can generate more income to support retirees. However, this approach has proven controversial, with concerns raised about age discrimination and the impact on workers in physically demanding jobs. If pensions continue to increase the retirement age, the UK could react in a similar way to France, which has seen numerous protests and demonstrations over retirement age in recent months.
Another approach to managing the impact of declining birth rates on pensions is to encourage greater participation in the workforce. Employers can offer flexible working and retirement arrangements that allow employees to achieve work/life balance. By enabling older workers to reduce their hours or transition to part-time work and by making it easier for younger workers to continue to be part of the workforce while managing family care responsibilities, employers and pension schemes can tackle the problems birth decline poses to workforce and pension contribution decline.
The Gig Economy
Finally, gig workers have become a significant part of the UK workforce. The number of gig workers is now about 7.25 million, making up over 22% of the workforce; this has been a rise of over 6% just since 2021.
This rise of gig-workers presents a unique challenge in pension scheme management, as many gig-workers are classified as self-employed and do not have access to traditional pension schemes. The recent UK Supreme Court case of Uber BV & Others v Aslam & Others (2021) confirmed that the Uber drivers who brought the action should be classified as workers and entitled to certain employment rights, including access to a pension scheme. However, the challenge remains in whether other businesses will apply this ruling and ensure that gig-workers have access to affordable and flexible pension options.
One solution is to develop new pension products tailored to the needs of self-employed workers, such as flexible contribution rates and alternative investment options. For example, the courier service Evri launched their "self-employed plus" scheme, which recently provided expanded benefits and automatic pension rights in 2022. Employers in the gig economy can also play a role by offering voluntary pension schemes and matching contributions. By doing so, pension scheme managers can help promote greater financial security and inclusivity for gig-workers, while also ensuring the long-term sustainability of pension schemes in the face of changing workforce demographics.
Actions for employers
Employers and schemes must be proactive in adapting their pension schemes to ensure that they remain sustainable in the face of these demographic changes. This may involve rethinking investment strategies, encouraging greater workforce participation, and developing new pension products for gig-workers. By doing so, they can ensure that their employees have the financial security they need in retirement, while also remaining competitive in a rapidly changing economic landscape.
If you would like to discuss anything raised by this blog, please get in touch with a member of the team.
