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CBI Evidence to the House of Lords enquiring Essay

  1. Aging Population in the United Kingdom

In many European countries the problem of an aging population is forcing concern on the society at large. This is primarily arising from an increase in life expectancy and a decline in fertility rates.  It is also expected by the Confederation of British Industry1 that this problem will also take place in the United Kingdom.  The demographic study took until 2000 shows that the life expectancy of people in the United Kingdom increased by an extraordinary rate for men, which between 1840 and 1960 rose by only one year.

Now the life expectancy of man increased in the range of 75 to 80 years.  This obviously applies also for women, which its increase is of a slightly lower rate.  The fertility rate, as indicated by this demographic research, decreased sharply from 2.2 to 1.6 births per women, between the periods from 1950 to 2000.

However, population in the United Kingdom is expected to rise at a slower rate than European neighbours.  It is planned, that between 2000 and 2011 pension age will increase by 10.2% from 10.8 million to 11.9 million.   This will rise faintly to 12.2% by 2021, but will enlarge at a faster rate over that period, reaching 16 million pensioners at 20402.

  • Problems encountered with an aging population

The first effect that an aging population will pose on the business environment will be greater involvement of original private pension schemes.  Presently, the United Kingdome pension scheme is directed towards the most vulnerable groups and is not universally targeted.  As a result, many individuals in this country already receive a momentous part of their income via private sector schemes.  The government objective is to increase the usage of private pension methods from just below 40%, as it stands today to 60% till 20503.

Unfortunately the Confederation of British Industry has identified a number of problems, which will diminish the achievement of such objective.  They noticed that there is increasing financial short-sightedness by British people, confusion about options available, lack of confidence in the private pension system, and financial inability by persons earning a low wage to commence a private pension scheme4.

The Confederation of British Industry and the Financial Services Authority suggested four main solutions that can be adopted in order to enhance the attainment of such objective.  These are described in the sub-sections below.

  • Increasing Confidence in the System

To ensure trustworthy private pension schemes it is important to minimise the failure rate of such systems.  We have to keep in mind that if utilisation of private pension is to increase as targeted, the financial pressure on such companies will increase.  It is therefore crucial that the longevity risk of the companies is evaluating, especially on the valuation of annuity business in their financial reports5.  A regulatory body like the Financial Services Authority should be employed to adopt continuous evaluation of such factors in order to boost potential customer’s confidence in such systems.

1.1.2 Changes in Taxation and Pension Regulations

Reforms in taxation and relevant legislations are necessary, as suggested by the Confederation of British Industry6 in order to mitigate the three other issues identified in the previous paragraphs that may limit the attainment of the government objective to increase use of private pension systems.

The first factor that comes to mind is the modification of the Inland Revenue regulations that govern balancing pension and work income.  Such rules, presently forbid employees working for firms that support their pensions, while drawing a partial pension.  These are putting workers in a cliff-edge decision of either continuing to work full time or fully retire.  These rules are thus hindering employees from continuing their long-term relationship with their employer, thus also affecting adversely the labour supply, which is very important as is explained in the proceeding sections of this article7.

Voluntary approaches to pensions should be promoted and allowed by legal requirements, in order to avoid compulsory systems enforced by employers.  The Confederation of British Industry, regard that the effect of such pension regulation will not completely remove the government pension scheme.  They preclude that some individuals will still apply the public pension system because it is more economically feasible for them to adopt such system8.

One of the suggestions of the Financial Services Authority plays an important role here.  The authorisation of voluntary approaches demands that clients’ knowledge on such area is imperative.  It is therefore recommended that the government adopt ways that assist employers to provide employees information on the need for planning and saving for retirement and voluntary methods available to achieve such need9.

The adoption of the Alan Pickering Review is also highly welcome by the Confederation of British Industry.  Such regulation improves simplification in the contracting-out regulations by allowing a 1% accrual system, with no extra requirements for automatic indexation or inclusion of survivor’s benefits10.  In the long-term, this rule can induce employers to start introducing new schemes, thus supporting more originality on these financial markets, whose need is greatly demanded in the aging population era11.

  • Arguments against savings proposition

A research carried out by Dr. Nigel Duck at the University of Bristol12 provides arguments that diminish the strength of the effect of the aging population on savings rate.  They contend that the effects of an aging population on the cumulative savings rate are modest, since such pressure would have already been absorbed by other economic factors like inflation and the business cycle.   These researchers therefore conclude that the above-mentioned modifications on pension and taxation regulations are not of a critical importance.

1.2 Lower Supply of Labour

A dramatic negative effect that the aging population will have on the majority of business enterprises in the United Kingdom is the lower supply of labour.  As the working population decreases due to lower fertility rate, so will the labour supply leading to wage pressures directing towards inflation.  In this respect, the Confederation of British Industry suggests that policies like introduction of age discrimination rules and the new deal for the over 50s should be adopted in order to increase the period of older workers in the working population13.

BIBLIOGRAPHY

Confederation of British Industry, CBI Evidence to the House of Lords enquiring into the effects of the ageing population in the UK, retrieved 26th September 2006, http://www.cbi.org.uk.

Economic and Social Research Council, Britain’s Ageing Population won’t Push Up Savings, retrieved 26th September 2006, http://www.esrcsocietytoday.ac.uk.

Financial Services Authority, Both firms and consumers must face up to risks of ageing population, says FSA, retrieved 26th September 2006, http://www.fsa.gov.uk/Pages/Library/Communication/PR/2002/054.shtml.

The Weekend Australian, Economic Crunch of Ageing

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, August 2006, retrieved 26th September 2006, http://www.the australian.news.com.au/printpage/0,5942,20152548,00.html

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