Ageing Population Burden or benefit

1
Managing the Income Accumulation/ Divestment
Needs During the Transition from Full Time Work
to Full Time Leisure
Retirement The beginning of the end or the end
of the beginning? By Peter Barnett Icki
Iqbal

• Ageing Population - Burden or benefit ?
• Balmoral Hotel, Edinburgh 20-22 Jan 2002

2
Agenda

• Composition and characteristics of the Over 50s
• Retirement patterns
• Income patterns
• Expenditure patterns in old age
• Segmentation
• Possible financial solutions and the role of
  advice

3
The Over 50s

• Income gt 150 billion
• 19.6 Million people are over 50 (33), 25 Million
  (42) by 2021
• Gender equality at 60 by 85 women outnumber men
  by 3-1
• Have 80 of all wealth
• On average have 30 higher disposable income than
  under 50s
• In May 2000 four million people aged over 50 had
  a computer and spent an average of nine hours
  each week using it
• 50,000 small businesses are started up every year
  by over 50s, 70 of which will still be trading
  after 5 years (average 28)
• This session is concerned only with the 50-75
  cohort

Source ONS/Age Concern / Haslam Callow
4
Financial needs of the 50-75 age group

• At the start of the third quarter-century of
  ones lifetime most of us are likely to be in
  full time gainful employment
• At its end most are likely not to be in it
• The transition might occur at a single date,
  which might be of ones choice
• It might be unplanned
• Alternatively it might be a gradual transition.

5
Financial needs of the 50-75s

• Pension fund income to maintain lifestyle
• Investment income and advice
• Lump sum to pay off mortgage
• Lump sum to improve lifestyle. e.g. holiday, new
  car, etc
• Income to pay for domestic bills and services
  e.g. gardener
• Estate Management - The reduction of IHT
  liability

• Large lump sum to pay for medical expenses
  e.g. Hip replacement
• Funds to pay for care in a domiciliary or
  residential setting
• when needed

6
Objective
To manage capital and assets in a way that meets
lifestyle, care and aspirational needs for the
remainder of the clients lifetime
Investments incl. cash
Property
Pensions
Client
Essential living costs
IT IHT CGT
Aspirational Living costs
Care costs
7
Consumer issues driving change

• Demography, longevity, morbidity health
  improvement
• Falling birthrate, dependency ratios, healthy
  life expectancy
• Delayed marriage/family formation - more single
  people
• Changing attitude to inheritance and property
  ownership
• Different approach to technology between 'young'
  and 'old
• Different attitude to risk, self-provision and
  insurance between different generations of
  consumers

Result Older consumers are confused,
ill-informed and unprepared
8
More people - Living longer but healthier?

• In 1999 12.2 million people (20.4 of the
  population) were over 60 years of age and 6.7
  million people (11) were over 70.
• By 2021 16.2million people will be over 65 (27)
  11.9 million over 70 (20)

• In the UK both men and women life expectancy
  has increased to
• a greater extent than healthy life
  expectancy. (In other European
• countries, and the US, morbidity
  compression is occurring
• - definitions of, and measurement of,
  levels of impairment ? )
• The UK data implies that in future there will
  be more older people,
• mostly women, who will be more impaired for
  longer

Sources HTA Care of Elderly People Market
Survey 2001 Laing Buisson/ONS Social trends
2000
9
The Vertical Family- Expenditure and wealth
The inter-generational contract
Expense Wealth
Siblings
Siblings
Grandchildren
Source The Millennial Family, Future Foundation
10
First Message
Calibrate income levels to the the maintenance
of the health status of both the principal and
their partner. This so they can live long and
well enough to fully enjoy the fruitful
retirement they have striven for all their
working lives
11
Any value in old age?
When you are younger you dont think you will be
65 I didnt think it would happen Female, 67
Suddenly you have stopped your professional
life, suddenly you are a nobody. If you are in a
fairly high profile job that is something worse
than death to be cut offyou cant spend the rest
of your life growing roses or prize leeks.
Male, 61
I see from quite a few people I know who work so
hard all their lives, they retire, then they
die and you think it is so sad, they have
struggled Female, 55
Theres no way you can prepare for itits like
all of the important, big decisions in
lifetheres no way I know if you can prepare for
retirement Male, 62
Wonderful to have the time - so long as you have
your health Female, 56
We are talking about the unknown we talk about
this as if its walking through a door into the
unknown. And on the door it says retirement and
we dont know whats there, except we know we
will not be going to work Male, 53
I think the nicest thing is to be able to travel.
Go away when you want to not when it is
convenient to someone else Female, 54
Source Haslam Carrow
12
(No Transcript)
13
Lumpy Lifecycles- a Basis for Innovation?
Source The Henley Centre 1999
14
Funding retirement
A man retiring at 60 can expect to spend 17.8
years in retirement ONS 71 of people
expecting a ret. fund of gt30K actually achieved
it DSS 40 of people felt they had not
saved enough for retirement

DSS retirement
survey Only 57 of adults in full time
employment are in company pension schemes (24
of those with no pension had incomes over
25,000) and 27 of workers have no savings to
retire on at all

General
Household Survey A man retiring now at age 60
who has contributed 10 of salary for 30 years
can expect to get a level pension of 66 of final
salary. A man aged 30 today contributing 10 will
get a pension of 24 of final salary at 60
IOA
15
Adults over 50 holding selected forms of wealth
by age. 1997-1998 (GB)
50-59 60-69 70-79 80 Post
Office Accts. 6 7 10
12 National Savings 4 10
12 11 Current accounts 85 80
72 61 Building Societies 59 59 58 54 St
ocks shares 30 28 22 17 Tessas
18 18 12 7 Peps 17 16 8 4 Unit
Trusts 7 8 5 4
NB. In twenty years time will todays 55 year
olds act like todays 75 year olds?
Source ONS
16
Retirement patterns
Distribution of retirement ages.
Men
Women Age All OP
NOP Prof. All OP NOP Prof.
lt60 21.0 23.4 15.2 23.6
31.6 33.4 30.3 37.5 60 10.6 10.5
10.8 16.6 36.8 33.4 30.3
37.5 61-64 23.6 25.6 18.5 26.5
16.1 17.1 15.3 18.9 65 36.4
34.1 42.1 23.6 10.7 8.7 12.0
7.5 gt65 8.4 6.4 13.4 9.9
4.9 5.0 4.9 5.3


Source DSS
17
When do people retire?

• Distribution of retirement ages.
• The mean retirement ages are 62 for men and 59
  for women
• 36-37 of both men and women retire at the state
  pension ag
• Nearly half of men and a third of women retire
  before their SPA
• A third of women retire after their SPA but only
  8 of men
• 60 of men with occ. pens. retire before the SPA.
  c.f 45 without
• Over 66 of men in white collar occupations
  retire before their SPA c.f. 50 of unskilled
• Redundancy accounted for 36.6, ill-health 26,
  of male early ret.
• One in three people between 50 and the SRA are
  not working
• Whose decision is it ? individuals or familys?

Source DSS
18
Income patterns

• OAP is linked to RPI not NAE
• RPI used is general RPI not pensioners RPI
• General RPI excludes
• Top 4 of households
• pensioner households relying on state benefits
• People living in institutions
• Direct taxes and NI contributions

19
Expenditure patterns

• Heads of households weekly spend
• Average spend of 50-64s is 395 and of the
  65-74s 260
• But the top 60 by income of gt 65-74s (36 of
  the cohort) spend between 325 and 640
• The top 20 by income of 65-74s (7) spend 12
  of the total age group expenditure on housing and
  26 on motoring.
• 50-64s spend 36 on insurance while 65-74s
  spend 21
• gt 65s spend over twice us much per head as
  younger people on OTC medicines and medical fees

Source ONS family spending survey 2000
20
Spending on Leisure Goods and Services by age
group - 1998
75 (5)
16-30 (10)
65-74 (10)
50-64 (29)
30-49 (46)
Note Based on changes in numbers in each age
group only (i.e. assuming no change in relative
amounts spent)



Source Family Expenditure Survey/ONS/The Future
Foundation
21
Spending on Leisure Goods and Services by age
group - 2016
75 (5)
16-30 (9)
65-74 (12)
30-49 (40)
50-64 (34)
Note Based on changes in numbers in each age
group only (i.e. assuming no change in relative
amounts spent)



Source Family Expenditure Survey/ONS/The Future
Foundation
22
Segmentation ?

• Gender
• Single male
• Single female
• Married couple
• Economic
• Wealthy
• Struggling
• Poor

• Behaviour
• Active
• Acceptors
• Constraints
• Age
• Young old
• Middle old
• Old old

23
Segmentation by Age
24
Financial planning, Investment, savings and
protection opportunities in retirement based on
segmentation by age

• Private health funding PMI, CI? (Y)
• Simple income generating savings vehicles -
  ISA's (Y,M)
• Equity Portfolio Management (Y,M)
• Pension annuities (Y,M)
• Impaired life annuity (M,O)
• Equity release (M,O)
• LTCI (family history) (M,O)
• Care care services (M,O)
• Inheritance tax planning (O)
• Immediate need products (O)
• Role of Trusts (Y,M.O,)

25
Sources and application of funds for Nursing Care
( p.w. for female aged 80, domiciled in South
West England. With 110 p.w. free nursing care)
Sources of funds
Nursing Care Costs
110 50 75 172 407 110 297
State Pension Occ. Pension Immediate need
annuity Savings/ Family Equity Release Total
72 50 40 15 120 297
Nursing (G) Nursing (I) Personal Care (I) Hotel
(I) Total -Free Nursing Personal Cont.
26
Tomorrows patient

• The patient of the future will
• Be better informed and be more educated
• Be short of time
• Be more affluent
• Be less deferential to authority
• Will want more control and choice
• BUT
• Social care accounts for twice the costs of
  health care
• How will the changes in demographics and
  longevity affect social care levels and costs?
• 
  

Source Wanless report 2001 p16
27
Funding health care - the hierarchy of opportunity
Residential
Sheltered Accom.
Domiciliary care
Early intervention
Information, advocacy and support
Portfolio of investment and care funding solutions
28
Second Message
As part of a wider market segmentation exercise,
the undertaking of primary qualitative and
quantitative longitudinal research into
intergenerational changes in consumer attitudes
to issues such as pension scheme membership,
owner occupancy and inheritance, is critical to
identifying the market for our products.
Coupling this with a public education programme
as to the realities of poor public health and
welfare provision would be a powerful fillip to
financial services businesses.
29
Requirements from financial products

• Accumulation of savings whilst earning
• Divestment of savings whilst not earning or not
  earning enough
• Ability to cover expenditure needs
• As they change
• For as long as the individual lives
• Bequeathing inheritance to the next of kin
• Significant variations between individuals

30
Financial issues to consider

• Timing of move from accumulation to consumption
  unknown
• Expenditure pattern uncertain
• Basic needs
• Essential luxuries
• Quality of life in general
• Longevity uncertain

31
Trade-offs to consider

• Living well and bequeathing
• Living adequately and bequeathing
• Matching expenditure needs

32
Living and bequeathing

• Separate issues really
• Use insurance to make bequests?
• Use other non-property assets to live well?

33
Matching expenditure needs

• Problems in defining needs in advance
• Changes in health (self and partner) difficult to
  predict
• Advances might change needs (consider mobile
  phones)
• One possibility might be to pre-purchase basic
  requirements such as food and heating
• The product does not currently exist but the
  time-sharing formula could be a blue-print
• Alas, a similar prepaid long term care product
  does not sell
• If none of these are feasible, advice is needed

34
Longevity risk

• Probably the biggest risk facing most pensioners

35
Asset allocation

• Asset allocation
• During the accumulation phase
• During the dis-investment phase
• Risk and reward profile matching with customer

36
The product needed

• Informed advice is the product and is the
• cornerstone of the consumers route to his
  solution

37
Advice on

• Risk profiling of the customer
• In regard to money
• In regard to health
• Asset allocation
• During accumulation
• During dis-investment
• Expenditure pattern
• The extent to which non-basic items are essential
• Likely future pattern
• Living v bequeathing
• Longevity protection
• Best estimate life expectancy for state of health
• The need for protection (governed by Micawber
  rule)

38
Third message

• Marketing people talk of mass-marketing to units
  of one.
• Actuaries, who traditionally have dealt with
  corporate customers can reinvent themselves
• Become a secular priest, a regulated FIA, not IFA
  

39
The Way forward

• We must develop products which are appropriate to
  this lifestage, to these people, to their needs,
  with good health as an enabler
• Think about the role of these products in
• enabling life and living
• enhancing the quality of life
• facilitating creativity
• simplifying life

Deliver the promise!
40
Health Social Care Act -2001 (What does free
care really mean?) Average Weekly Nursing Home
Cost (Govt contribution to Nursing cost 110)

Region
Source Laing Buisson
41
LTCI -What has been the experience?
Market projection in 1996
Annualised premiums
Actual
000
?
Estimate for 2006/11 was 200 Million
LTCI is designed to pay for nursing care for as
long as it is needed
Source Mintel
42
Pre-Funded LTCI - Pull or Push?

• Why havent IFAs sold more of these products?
• Its a hard sell because of
• Affordability - Other more essential spending
  needs always emerge. i.e. marriage, children,
  divorce, unemployment Im paying twice - So
  it is low down the consumer priority list
• Confidence - LTCI is usually a top-up to
  complement self funding and
• people think that pensions will be
  sufficient for lifestyle and protection
• pus there is wide public mistrust of the
  F.S. Industry
• Clarity - How does the product complement state
  provision? There is low consumer awareness
  regarding State benefits and future intentions
  The state will always provide - so there is a
  disinclination to act
• Planning - The public are not interested in
  thinking about unpleasant subjects like care in
  old age and would rather wait until it happens
  it wont happen to me and if it does there are
  immediate need products

43
Immediate need products

• Why is Immediate Need selling better ?
• Buy not a sell patient is already in care
• So its a question of when and how much care,
  not if
• The Client is the family of patient the
  ones with the problem!
• Fewer assessment issues readily apparent ADL
  failure
• Poor quality of state provision very obvious
• Lack of good quality accommodation
• What accommodation is available is very
  expensive

44
Securing Our Future HealthThe interim Wanless
report - Nov. 2001(Full report to be issued in
April 2002)

• Terms of Reference
• To examine demographic, technological and medical
  trends over the next two decades
• Identify the key factors which will determine the
  financial resources required to ensure that the
  NHS can provide a publicly funded service
• Assess financing systems against efficiency,
  equity and choice criteria
• Medical Findings
• L.E. at birth for females is lower in the UK than
  any other country (EU USA Japan Aus/NZ)
• L.E.at age 65 for males and females is lower than
  any other country
• Infant mortality is the highest in Europe
• Breast cancer survival rates are the lowest in
  Europe
• Lung cancer Survival rates are the lowest in
  Europe
• Except for males in the Netherlands?
  
• 
  

Source. Wanless report pp.12 66
45
Securing Our Future HealthHealthcare cost
implications

• While levels of very serious ill health are
  falling, older people are experiencing more minor
  health problems
• As people age their health care needs increase
  but proximity to death has a larger impact on
  health care costs than age
• A quarter of all lifetime healthcare costs occur
  in the final year of life
• The cost of the last year of life falls with age
• Less than 15 of the growth in health care
  spending over the last 35 years can be attributed
  to meeting the needs of an ageing pop
• It is possible that the effect of an ageing
  population will be to postpone rather than
  increase health service costs
• The increase in NHS healthcare funding is being
  driven by increasing public expectation and
  technological change as well as labour costs

The Wanless report - Securing our future health
Treasury 2001 p3822
46
Securing Our Future HealthSources of
healthcare financing

• Conclusion
• Financing through general taxation is
  generallymore efficient a Public financing
  system is equitable and does not discourage
  people from seeking treatmentPrivate insurance
  financing is highly regressive and inequitable..
  shifting from public financing to private
  spending will shift the burden from the
  relatively rich to the relatively poor
• While choice is likely to be greater under
  private medical insurance the issue for this
  review is to ensure that it is costing an NHS
  where standards of care criteria are met. There
  will still be, as at present the opportunity to
  pay for private insurance, in addition to paying
  taxes and NIC, and receive in return a greater
  element of choice
• There is no evidence that any alternative
  financing method to the UKs would deliver a
  given quality of healthcare at a lower cost.
• 
  
  

Source Wanless report 2001 p56 57
47
Wealth management

• Equity Release Mechanisms
• IHT
• Trusts
• CGT

48
Households by postal district with a value gt100K
Source Street Value
49
Inheritance Tax mitigationIHT is a voluntary
levy paid by those who mistrust their heirs
more than they dislike the Inland Revenue
Lord Jenkins of Hillhead
Send directly to Gordon!
Do you know this man? You should - he is smiling
because you will be leaving him most of your
money!
Open your wallet and repeat after me Help
yourself
From April 2001 the lower limit is 242,000 The
average house price in England and Wales is
118,000 -in Surrey it is 222,000 !