Demographic change

There has been a lot of media interest this weekend on the financial impact of demographic change following the call for evidence from the Scottish Parliament Finance Committee. Scotland's population aged 65 and over will increase by 21% from 2010 to 2016 and 62% by 2031. For those aged over 85 there will be an increase in the population by 38% by 2016 and 144% by 2031.

In my view there is a tendency to concentrate on the negative aspects of the ageing population. There are opportunities as well as challenges arising from the increasing number of older people. Studies at Newcastle University, amongst others, highlight that many older people are living healthier lives to a greater age which will decrease the number of years that they require care. That is after all the justification for changing the state pension age. Older people also make a productive contribution through caring and volunteering in various settings and, since the abolition of the Default Retirement Age many of them are continuing to work well beyond the previous norm of 65. Many local economies recognises the benefits of attracting the 'Grey Pound'.

It is important that we have a balanced population and there are some positive signs. Scotland’s population has been increasing for nine years reaching 5,254,800 by the middle of 2011. Despite a decrease in the number of births, this was outweighed by a decrease in the death rate and, crucially, a greater increase in the inward migration to Scotland, which has brought mainly young people, aged between 16 and 34. This is vital for economic growth and highlights the need for a different approach to immigration in Scotland.

The Committee is also concerned about the cost of public service pensions. This was addressed in Scotland in 2008, and as the Hutton Report showed, the cost of public pensions will fall from 2% of GDP to 1.8% in 2030 and 1.4% in 2060 as a consequence of those reforms. In addition, increased member contributions and switching the indexation of pensions in payment from the Retail Price Index (RPI) to the Consumer Price Index (CPI) measure of inflation, will save at least 15%. A later retirement age will make pensions even more cost effective. The real risk is UK government increases in pension contributions that could drive workers out of quality pension schemes, with the taxpayer having to pick up the bill in later years.

The Finance Committee has focussed on public service schemes, when they should also be concerned about the private sector. The shift from defined benefit (DB) to defined contribution (DC) in the UK has resulted in a general reduction in pension contributions and therefore income in retirement. Employers have taken the opportunity to reduce their contributions and this will inevitably have a negative impact on public finances. This has been highlighted by the OECD and even the Association of British Insurers. While auto-enrolment will establish a pensions floor, this is well short of the 12% minimum benchmark suggested by the industry. The fall in real wages and low confidence in pension products, including high fees, means this position is unlikely to improve. We need a radical rethink on the pension system and the Dutch model is a good starting point.

There are many other aspects of demographic change that we need to focus on including care integration, housing and the ageing workforce. However, it is not all negative and action has been taken to address many of these issues.