1.2.7 The impact of an ageing and prosperous population
Growing living standards, increasing longevity and an ageing population have also impacted on the market for financial products – particularly pensions. The knock-on effects of this development – for example, on the expansion of the asset management business – mark it out as the most material source of change in the financial services business in recent decades.
Although a proportion of the population are still solely reliant on state pension provision, a significant proportion have company pensions, which normally both employer and employee contribute towards. Company pensions themselves represent a financial product – albeit one which is typically not well understood by the ‘buyer’ of the pension product (i.e. the employee).
The growth in the importance of the pension funds can be traced to the Social Security Pensions Act 1975, which obliged firms either to contract into the State Earnings Related Pension Scheme (SERPS) or to provide their own scheme on at least equally good terms for their employees. The pension schemes are either run as funds, separately from the company sponsors, or managed on behalf of the employee contributors and their company by a financial firm.
The Social Security Act 1986 gave a further boost to the pensions industry by allowing individuals to take out personal pension plans – with this move being encouraged by financial incentives to switch out of SERPS into these private schemes. This initiative has also provided a boost to the insurance firms as they are the main providers of personal pension schemes. With contributions into pension funds being income-tax-deductible, and with the returns from a pension fund not being liable to taxation, pension schemes offer individuals a very tax-efficient means of making investments.
A further development that impacted on pension provision in the UK came in 1985 when the Conservative government enacted legislation (taking effect in 1988) which enabled individuals to opt out of company pension schemes and seek their own pension products instead. In line with many of the government initiatives at this time, the move was intended to give people freedom to make their own choices when selecting a pension product. With many opting to buy their own products, the pattern of pension provision altered in the UK. However, the initiative was disastrous. As a result of poor advice, many made poor choices of products and ended up with pension provisions materially worse than if they had stayed in their company schemes.
Becoming a member of a pension scheme results in becoming, albeit indirectly, an owner of shares since most schemes invest in these. The impact of growing affluence on the direct acquisition of shares – as opposed to those acquisitions made indirectly via pension schemes – has, however, been less marked. In fact, the percentage of UK shares directly owned by individuals as opposed to institutions has fallen sharply in recent decades, from over 50 per cent in the 1960s to around 12 per cent (in 2014) – although this has been more than offset by ownership arising from holdings in collective investment schemes.
One development during the 1980s and 1990s cut against this trend: the offer of shares to the public arising from the privatisation of nationalised industries, including the water, gas and electricity industries. This strategy was based on a desire by the Conservative government to reduce state involvement in the economy and bolster public finance from the receipts from the share issues – which totalled some £70 billion between 1980 and 1997.
The successive privatisations were also marketed as a way for the public to ‘buy in’ to the share market and, by implication, to the principle of private ownership of businesses. The buying-in of the public to share ownership was certainly encouraged by the prices at which most of the privatisation share issues were marketed to the public prior to their launch. In most cases, these share prices rose sharply immediately on the launch dates and, consequently, many members of the public quickly sold their holdings at a profit. Despite its high-profile impact in the 1980s and 1990s, privatisation has not materially impacted on the long-term (and marked) trend in the shift of share ownership from the public to institutional investors.
Following the publication of the Turner Report on pensions in 2005, the UK government has encouraged greater pension savings and has set out a phased increase in the State Pension Age (SPA). From 2010, the SPA for women started to be raised to 65 to bring it in line with the SPA for men. Between 2018 and 2020, the SPA will rise to 66, then to 67 between 2026 and 2028 and 68 between 2044 and 2046. The State Pension Age will be reviewed every 5 years with revisions to it likely to be linked to changes in life expectancy. This current plan remains broadly in line with the recommendation in the Turner Report to raise the SPA to between 67 and 69 by 2050. These developments reflect the financial burden that growing longevity is placing on the government’s finances.
Social and economic changes in recent decades have had a marked impact on the demand for pension products and other financial services. It is therefore perhaps unsurprising that the industry itself simultaneously went through a period of transformation at the same time.