«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»
Asset Accumulation in
Focus: The Challenges
By James Lloyd
International Longevity Centre - UK
The International Longevity Centre - UK (ILCUK) is an independent, non-partisan think-tank
dedicated to addressing issues of longevity,
ageing and population change. It develops
ideas, undertakes research and creates a
forum for debate.
The International Longevity Centre - UK is a
registered charity (no. 1080496) incorporated
with limited liability in England and Wales (company no. 3798902).
International Longevity Centre – UK 22-26 Albert Embankment London SE1 7TJ Tel. +44 (0)20 7735 7565 www.ilcuk.org.uk This report was first published in September 2007 © ILC-UK 2007 About the Author James Lloyd is a Senior Researcher at the ILC-UK. He read Philosophy at University College London and has Master degrees in Comparative Politics, and in Public Policy. He joined the ILC–UK in October 2005.
firstname.lastname@example.org ii About this Report This policy report is based on, and responds to, research published simultaneously by the ILC-UK entitled: Asset Accumulation across the Life Course 1.
The purpose of this report is to provide accompanying policy analysis and discussion to the Asset Accumulation across the Life Course research, for both a general and specialist readership. Its primary purpose is to provoke discussion.
Acknowledgements This report and the Asset Accumulation across the Life Course research would not have been possible without the generous support of Prudential 2 and Partnership 3.
The analysis for Asset Accumulation across the Life Course was undertaken by Richard Boreham of the National Centre for Social Research (NatCen) 4.
The author sincerely thanks all parties for their time, support and enthusiasm.
All opinions expressed in this report are the author’s own, and should not be attributed to any of the aforementioned organisations.
The report of the Asset Accumulation across the Life Course research can be downloaded from the website of the ILC-UK at:
http://www.ilcuk.org.uk http://www.prudential.co.uk http://www.partnership.co.uk/ http://www.natcen.ac.uk iii Foreword Nick Prettejohn Chief Executive, UK and Europe Prudential plc An ageing population and increased life expectancy present significant challenges for Government, the private sector and for society as a whole. Prudential welcomes this paper as an important contribution to the debate about how we all might adjust to the changes taking place in society.
The issues covered by this study are significant for retirement income providers such as Prudential because they highlight the need for providers to be able to respond if individuals are unable to rely on the state for support. As specialists in the field of retirement income we look forward to taking up this challenge.
The report also highlights the role that good financial education has to play in helping people to manage their finances in the current and future environment. Financial capability has been at the heart of Prudential’s corporate responsibility work for many years so we particularly welcome the recommendation that the ability of individuals to manage their finances should remain a key target of Government policy.
We believe that the paper’s call for a greater focus on debating ‘decumulation policy’ is timely, particularly in terms of the increasingly important role that the decumulation of housing wealth in later life is likely to play.
This is an important and sometimes challenging study. The insights into the changes taking place around intergenerational wealth transfers highlight key challenges that policymakers need to address. Prudential hopes that the report will find resonance with key policymakers and stakeholders, and that the results will be used to influence policy development and stimulate further debate.
A major examination of how people plan and save for the future is of crucial importance at this time of rapid societal change. Without investigations of this kind, the task of developing appropriate policy around issues such as the provision of long term care in response to increased life expectancy would be almost impossible. Partnership is therefore pleased to support this timely study, which provides valuable insights into the changes that have taken place over the past decade in the ways households have accumulated assets, and presents helpful recommendations as to the focus of further discussions and the possible shape of relevant policy.
The report’s focus on asset accumulation has brought to light a population with an increasing reliance on property as a means of saving for retirement, which in turn has served to highlight the urgent need for focusing on asset decumulation: e.g. how can the Government and the financial industry make it easier for those with most of their assets in the form of property to exploit this resource in retirement? Regardless of whether this reliance continues to grow, however, Partnership believes that, as the report recommends, studying the ways in which people exploit or plan to exploit in retirement the assets built up over their lifespan is crucial to the development of appropriate policy.
Partnership also welcomes the study’s call for an even greater emphasis on improving the quality and availability of financial advice and education, especially in relation to people approaching retirement. As a specialist provider of financial solutions for people with health conditions, Partnership is particularly cognisant of the challenges people in this age group face in finding sound advice from qualified advisers on the wide array of financial solutions available to them.
The issues raised in this examination of household finances and assets across the life-course are relevant to all of us, and represent challenges to which the Government and other stakeholders must respond. Partnership hopes that the report will provide policymakers with key focus areas for further discussion, investigation and policy development, which will help them to meet these challenges.
This policy report accompanies the publication of research by the International Longevity Centre – UK (ILC-UK) entitled Asset Accumulation across the Life Course. The purpose of this report is to discuss this research in the context of important contemporary challenges for public policy.
In light of evidence that the retirement asset-building of younger cohorts is being skewed toward property, the Government must continue to explore the development of new financial advice services, adapt ‘decumulation policy’ to the increasing role of property in household asset portfolios, and monitor how living in debt affects the behaviour and choices of younger cohorts.
Given evidence of the growing financial burden confronting those at the peak age for family formation, there is a clear risk that these trends will undermine the Government’s familyfriendly policies such as extended rights to paternity leave and flexible working. The Government needs to ensure there is a proper evidence base of research about how variations in asset accumulation are impacting family formation and related child-rearing decisions. Private sector lenders should explore extending the availability of payment holidays to focus on those starting a family, and the Government should review measures that could reduce the financial stress associated with family formation, such as extending the Sure Start Maternity Grant up the income scale.
Significant increases in net wealth have been experienced by older cohorts in retirement, in contrast to the common presumption that retirement is a time when assets are gradually rundown. These increases in wealth have resulted from rising property prices and suggest that despite objections to the use of means-testing toward older people in principle and in practice, the Government should continue defending this principle, while simultaneously improving the mechanisms involved. Furthermore, the Government should review the case for extending the use of means-testing in further welfare transfers to older people.
The increasing value of mortgages held by the young and the rising property wealth of older cohorts indicate a transfer of wealth has taken place: the current and future income and wealth of younger cohorts has been transferred to older age groups in the form of illiquid property wealth. The magnitude of this transfer poses a risk to the principle of intergenerational solidarity that underpins various functions of the state, such as the NHS and state pension. A new language of wealth inequality is required to cope with these changes and enable public debate and discussion. The Government should focus on protecting intergenerational solidarity in society, in particular, by exploring how societal risk sharing in public policy can take place across cohorts, rather than between the generations.
For example, an important and growing economic cost associated with an ageing population is the cost of providing long-term social care for older people. Proposals for meeting the required increase in spending on this form of care usually involve the state funding all, or the largest share of, this increasing cost. In light of wealth transfers that have taken place from younger to older cohorts via the housing market, the Government should explore alternative forms of risk-pooling which are cohort-based, and would enable older people to use their housing wealth to buy into a cohort-specific risk-pool to insure against the costs of requiring long-term care.
At present, the static real incomes of older cohorts during 1995-2005 indicate that they are not actually experiencing any real benefit from their rising property wealth. After several years in which ‘accumulation policy’ has taken centre stage in policy debate, the time is now right for all stakeholders to focus their attention on ‘decumulation policy’, in particular through downsizing and equity release. The Government should explore providing extra incentives to downsize for older people, without actually penalising older people for remaining in the homes of their choice. The Government should also focus on achieving the right housing stock, which will make downsizing a more attractive option. The Government needs to look again at the market for equity release products and review how this market can be improved, deepened and extended. Finally, the Government should continue to explore new forms of provision of financial advice, which is an essential third plank of an improved ‘decumulation policy’.
In conclusion, it is clear that significant changes to patterns of asset accumulation across the life course have occurred and require a response by policymakers and other stakeholders.
Younger cohorts have benefited from rising real incomes. However, where these increasing incomes are used to obtain and pay off increasingly large mortgages, it is debatable as to who is actually receiving the benefit of these increases; the housing market enables others to capture the benefit. Yet, given the static real incomes of older cohorts, despite their ballooning property wealth, it is not clear who really benefits from rising property prices, aside from the small minority owning two or more properties. Although it is common to believe that property is a good way of saving for retirement, today’s younger cohorts, forced to skew their retirement saving toward property, may find themselves in the same position as today’s older cohorts, with large volumes of illiquid wealth that are failing to contribute to any extra income in retirement. Indeed, the evidence suggests overall that rising property prices are in fact detrimental to retirement income.