Pensions and demographic risks  

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. 

“Younger people have the risk of their money not growing enough to keep pace with inflation, while older people run the risk of their money running out before they do. Younger people have long time horizons and are thinking about the future of the world. So, not only do they want real growth on their money but, typically, they also want their money to matter when it comes to dealing with environmental, social and governance risks.”

He adds: “These risks are still important to older people but are less critical as their personal time horizons are shorter.”  

Catriona McCarron, wealth manager at Ascot Wealth Management, also reflects on age as an important demographic risk factor for pensions: “The demographic risk of the ageing population means increased reliance on the state pension for those who plan drawdown and surpass their expected mortality age. 

“We use a higher-than-average age for projecting the affordability of income drawdown in cases like this, but also have a bank of clients who we know will feel more comfortable considering an annuitisation of their pensions should annuity rates rise over a certain percentage. This is because their capacity for loss of income is more important than their desire to perhaps pass assets down their bloodline or to have flexibility regarding how much they withdraw from their pot.

“We feel it is important to ask the ‘what if’ questions, such as what if a client outlives their pension plan, or loses the triple lock to their state pension for example, and how will they maintain their standard of living?”  

Another key question for consideration is: how long is the client likely to live for?

Fiona Tait, technical director at Intelligent Pensions, says: “We use ONS figures to identify average life expectancy but base the plan on the fact that the client could live much longer. In general, we plan for income to last until at least age 100 unless there are any relevant health conditions which make this unlikely.”  

Jonathan Cooper, head of paraplanning at Drewberry, also emphasises that planning goes beyond retirement: “An ageing population with increasing life expectancy adds additional pressure on pension savings and planning should include provision for care in later life.” 

And demographic risk is not just associated with older generations, as he points out: “At the other end of the spectrum, an increasingly tech-savvy population of younger savers needs to be engaged with retirement planning. Traditional advice routes need to be re-thought and remote or robo-advisory options developed.”  

 Fiona Nicolson is a freelance journalist