Increasing Life Expectancy

The LONGER LIFE CHALLENGE Children today have a more than 50% chance of living to more than 100. Andrew Scott Professor of Economics, London Business School Behind an unassuming row of yellow-brick houses on the edge of Regent s Park lies the London Business School (LBS). A series of glass doors open to reveal peaceful courtyards complete with well-maintained lawns and pleasingly-proportioned trees. It is the perfect environment to ponder tricky questions, such as the nature of retirement, when living to 100 is fast becoming the norm. Andrew Scott, professor of economics at the LBS, has been bold enough to tackle the thorny issues raised by longer life expectancy in his book, The 100-Year Life. Co-authored with Lynda Gratton, it identifies the need for a more flexible approach to life by policy makers, individuals and our industry. Increasing Life Expectancy The long-run data among highly developed countries show a steady underlying increase in longevity. Scott says: There is a resolute trend of life-expectancy rising by two or three years every decade for the last 150 years. This translates into each generation outliving the previous generation by around 10 years. Children today have a more than 50% chance of living to more than 100, he adds. While there is debate over whether this pattern will persist, at a minimum steps need to be taken to adjust for the current improvements in life expectancy. Scott says: The way we currently structure our lives is no longer sustainable. New Life Stages We are outliving the three-stage life. That s to say that there is now more to life than just education, work and retirement. Scott comments: As life expectancy extends beyond 70, new life stages are emerging. The first sign of those emergent life stages is the postponement of major life decisions. People are now less likely to get married, have children or buy a house in their twenties, states Scott. Changes are also happening at the end of people s working lives, with retirement no longer a cliff edge decision. 4 State Street Global Advisors DC Best Practice

01 Gradual retirement is more likely, with many retiring later, working part-time or even pursuing a new career. New stages later on in life have been created, says Scott. While individuals are already making these decisions to move away from the structure of a traditional retirement, government, employers and pension schemes are just coming to terms with the challenges this increased longevity poses. The Challenges of Living Longer The initial reaction of policy makers is generally to increase the age of retirement to reflect this longer life expectancy, while pension providers are encouraging savers to set aside more of their salary to ensure they have sufficient funds. But neither reaction is adequate to the scale of the challenges. The fundamental problem with increasing the retirement age is that life expectancy gains are unequal. Scott says: Increases in longevity are limited for those who have physical or lower income jobs. Raising the retirement age for all effectively eliminates it for certain demographic groups, he adds. Nor is the pension providers solution of persuading people to save more particularly helpful. Scott comments: While saving more would be a rational decision, most people find this hard. It is difficult to persuade people to save enough to fund current longevity, let alone living to 100 years old, he adds. The problem with both of these solutions is that they ignore the fact that as people live longer, they will experience more stages to their lives. It is not as simple as extending the working stage of their life, states Scott. Working intensely for longer is challenging because it is difficult to maintain skills, productivity and motivation. Scott remarks: The concept of a sixty-year career is absurd what could be learnt at the age of 20 which would remain relevant for six decades? Contribute The Longer Life Challenge 5

But it s not just about maintaining skill, knowledge, reputation and a professional network. Other intangible assets also have to be looked after, including maintaining mental and physical health, as well as cherishing relationships with family and friends. Scott says: Study after study shows it is being loved and having the capacity to love which creates a good life. their forties, fifties or even in their sixties because their skills will have become redundant. There will also be a desire to vary goals at different stages of life. Scott remarks: There will be certain stages where people want to focus on making money. And at others they will want a better work-life balance. Liminality There is another set of skills which, up to now have not been important, but will become more vital over the longer term. Scott comments: As the number of life stages increases, people will need to improve their ability to deal with change. Anthropologists have a term for this ability to deal transitionary stages of life liminality. Updating skills and changing focus mean people will go through multiple transitionary periods of their lives. Scott says: That s where people s ability to deal with transition will be so crucial. Flexible Retirement Options While these societal changes will throw up considerable challenges for individuals and government policy makers, they also create PATHWAY TO APPROPRIATE LONGER LIFE DEFAULTS 1 Matches members objectives across the glide path 2 Offers members flexible access to their pensions 3 Accumulation, pre-retirement and payout phases not fixed People will have to re-educate themselves in their forties, fifties or even in their sixties because their skills will have become redundant. Dealing with change is challenging. Scott says: People find transitions unsettling and dislike them intensely. The way that globalisation and technology is changing means that society is going through a process of liminality. Over the longer term, people will have to become more adept at recognising they need to make transitions and become more adept at handling them. For example, career skills will have to be updated. Scott comments: People will have to re-educate themselves in problems for the pension industry. Retirement will need to become a more flexible option. Scott comments: Companies will need to give their members the option to retire at different ages as well as spelling out different options. Those options should include the benefits of continuing to work part-time as well as full retirement, he adds. DC schemes should reflect these options. Scott says: Schemes should ensure that members can 6 State Street Global Advisors DC Best Practice

Investment Design for the 100-Year Life Maiyuresh Rajah Senior DC Strategist State Street Global Advisors As members redefine their working lives to help cater for a longer life, investment strategies of DC pension schemes will need to be redesigned to help members meet their goals. Lifestyle strategies with fixed lockstep periods that move members from an accumulation phase to a preretirement (reducing risk) phase to a payout (lump sums/regular income) phase will become less relevant. People will need a strategy that matches their objectives across the glide path. For example, the payout phase will no longer just be a defined period towards the end of the glide path. Members will also need to access their money, and possibly receive a regular income, while they retrain and reinvent themselves during parts of what is currently seen as the accumulation phase. The retirement payout phase may also need to start later, as members second careers start to provide sources of income well into what would have traditionally been retirement years their 70s and 80s. Members want flexible access to their pensions, allowing them more adaptability in their life and career choices. However, this need for increased flexibility will bring its own issues and lead to a real risk of retirees running out of money in very old age when they reach their late 80s and 90s. Members generally underestimate how long they re likely to live and may not plan appropriately to have enough savings in very old age. In addition, the longer a member lives the more difficult it can become to make financial decisions due to the decline of cognitive ability in later life. A potential way of solving the longevity problem is to provide members with a secure income in later life. However, to overcome the risk of cognitive decline, the decision to receive this secure income will need to be made earlier in a member s life. An investment strategy that includes the purchase of a deferred annuity type product earlier in life will help protect against cognitive decline risk and provide a secure income in later life without the associated decisionmaking challenges. 4 Offers a secure income later in life 5 Starts the retirement payout phase later easily change the date at which they retire as well as facilitating partial-retirement. There should also be a move away from a pensions mentality towards a life-time savings approach. Scott states: The industry needs to develop products that will allow people to fund the transitory stages of their life. Financial assets will no longer be built up to be run down in retirement but are more likely to rise and fall throughout the lifetime of the member. But while many members will see their life expectancy increase, it will not change for certain demographic groups. Scott comments: Schemes will need to analyse their member populations carefully and ensure they have appropriate retirement ages for different workers. Perhaps the biggest challenge is the higher probability of more people becoming increasingly incapacitated by diseases associated with old age. Scott says: The longterm wealth industry needs to be a part of the long-term social care solution it is too great a cost for the state to bear alone. Nigel Aston, Head of European Defined Contribution at SSGA (Left). Andrew Scott, Professor of Economics, London Business School. (Right) Contribute The Longer Life Challenge 7

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