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Pensions and demographic risks  

This article is part of
Guide to pension risk

Pensions and demographic risks  
 Photo by Mikhail Nilov from Pexels

Different demographics of the population experience different pension risks, depending on age, location and various other factors. 

Also, the fact that the UK population is getting older and living for longer could be viewed as a demographic risk in itself.

As Jon Young, financial planner at WealthFlow, says: “Your pension pot has to last for longer and probably has to pay for a more active lifestyle in retirement than it did previously.” 

However, people might not be sufficiently aware of this, as Ryan Medlock, senior investment development and technical manager at Royal London, explains: “We know that on average, the majority of people tend to underestimate their life expectancy by five to 10 years. This, for example, could mean that some individuals don’t think their retirement income needs to last them as long as it actually does.”

The pensions market has also been affected by longevity, as Young says: “The financial pressure of paying income for longer on guaranteed sources of income, such as defined benefit pensions, state pension and annuities has decimated the market.”  

He adds: “The past decade has seen annuity rates dropping and increases to the state pension lag behind inflation, so the trend with demographic risk is that we will collectively have to become more responsible for managing our finite pension pot in retirement.”  

However, there are indications that people are continuing to struggle with this, according to a report by the Centre for Ageing Better in June 2021, based on research it commissioned from the Pensions Policy Institute.

It found that as many as 5m people coming up to retirement are at risk of not having enough money to retire on. It also found that 90 per cent of people of all ages, with defined contribution pensions could be at risk of having less to retire on than they expect. 

Location and age

Pensionbee’s March 2021 survey of the impact of Covid-19 on the next generation of retirees also found some pension risks for the demographics studied. These included generation X, millennials and generation Z – defined in the report as 41 to 54-year-olds, 24 to 40-year-olds and 18 to 23-year-olds, respectively.

For instance, it found that 6 per cent of the generation X age group have no pension saved yet, despite edging closer to retirement. The figure dropped slightly, to 4 per cent for millennials and to 3 per cent for generation Z.   

The survey also found demographic risk associated with location. Pensionbee’s research showed that the UK’s highest average pension saving was in Edinburgh, at £82,000, in stark contrast with that of Glasgow (its residents had the lowest average pension savings at £22,900). Looking at English cities, Londoners only had the eighth-highest average pension pots at £42,299. The report noted that this may be due to the high cost of living in the capital.  

Age, however, may be the key demographic risk, as Henry Tapper, executive chair at AgeWage, observes: “The demographic risks that apply to DC pensions are mainly about people's age.