Investment Life & Pensions Moneyfacts: The cold, hard truth

This article was originally commissioned for Investment Life & Pensions Moneyfacts Magazine. Tom Murray looks at how the high old-age dependency ratio afflicting Finland should serve as a warning to the UK Government that a long-term strategy is needed.

These are troubling times in Finland.  The Finns have created a well-run country that provides a high standard of living for the majority of their citizens and they have one of the highest happiness ratings in the world – 5th according to the World Happiness Report 2016.

However, before anyone starts booking him or herself a flight to Helsinki with a view to settling down in what appears to be one of the world’s paradises, bear in mind that the Finns have one major problem which they are struggling to come to terms with.  If they can’t come up with a solution, their entire lifestyle could come under huge strain.

In Finland, they have a particularly generous welfare state, which provides a lot of help to the elderly, particularly in terms of pension levels and the provision of long-term care.  Benefits like these, however, are not cheap and the provision of them is dependent upon a constant supply of new taxpayers starting into the working life cycle to maintain the lifestyles of those who are exiting into the retirement phase.

And Finland’s birth rate is dropping constantly.  Therefore, the ability of the state to continue to look after those at the end of their working life is being severely eroded by the lack of sufficient new workers who can carry the burden in the future.


The trouble for the Finns lies in the fact that their fertility rate is one of the lowest in Europe and has been for many years.  This is despite the fact that Finland has one of the most generous support systems for pregnant women in Europe and is a leader in efforts to ensure that child-care responsibilities are shared.  Yet still the numbers of births per thousand is dropping and the old-age dependency ratio worsens.

Their old-age dependency ratio is now among the highest in Europe at well over 31% and is forecast to rise to over 45% by the year 2050.  What is now a severe situation could soon become catastrophic if the government can’t get to grips with it, yet all attempts to date to reverse the process by encouraging more pregnancies has fallen on deaf ears.  It has got to the stage this summer where the leader of the opposition, Antti Rinne, actually urged women to ‘fulfil their patriotic duty’ by having more babies.  Apart from causing huge controversy, nobody expects this high-pressure tactic to work in solving the overall problem.  But Finland is boxed in and must do something before the situation gets out of control.


Reading about the situation in Finland caused me to consider how we were faring in the UK.  The situation for us is slightly better.  The old-age dependency ratio is only 27% as measured in 2015 and is forecast to reach 40% in 2050.  However, it is clear from the constant stream of TV programmes and media articles that the system for the provision of pensions and long-term care to the elderly is already under huge strain.

Unfortunately, the immense issue of Brexit is dominating Government policy-making efforts and leaving very little time for it to address the many other issues facing the country.  As a result, crucial issues such as how to provide for an ageing population are being left in the in-tray as the civil service grapples with a whole series of Brexit-related public policy areas.

This is unfortunate, as the situation will only get worse, the longer it is left unaddressed.  In the case of public policy for the elderly, this is particularly ironic as the problem is only going to grow at a more severe rate, as an unintended consequence of Brexit.

This is because one of the key reasons for Brexit is to reduce the number of immigrants into the UK, which will consequently reduce the number of British emigrants to EU countries.  The difference between the two will exacerbate the dependency issue, as UK emigrants are substantially composed of retirees seeking to spend their retirement abroad whilst immigrants are substantially composed of younger people seeking to work.  The net result therefore has to be that the old-age dependency ratio will go even higher than previously forecast, as more retirees remain in the UK and less young people come to work.

Whilst everyone appreciates that the Government has a lot on its plate, the fact that we know there is going to be a problem and that these negotiations are going to make it worse makes the need for a comprehensive policy to deal with an ageing society even more urgent than it is already. No one would recommend that the Government follow Finland and get involved in trying to increase the rate of population growth.  I’m not sure the citizens of the UK are reading for public service announcements urging the population to increase its rate of reproduction – “Keep calm and lots of carry on”? – But that doesn’t mean that there isn’t grave concern about the ratio amongst those who study these matters.

It is essential that the Government seek to broaden out the pool of people working on policy areas if the UK isn’t to stagnate over the next few years whilst the Brexit negotiations are proceeding.  In the matter of the old-age dependency ratio, a means has to be found to get the life and pensions sector involved in devising more solutions to the issues of retirement.  They are the experts and are extremely capable of coming up with innovative solutions to the problem.

Combining them with a non-partisan all-party committee would help to ensure that there would be less focus on politics and more on the type of long-term strategic policy that is so urgently required.  There are many areas that are key to solving the issue and yet are so politically explosive that they would be better dealt with in a more expert and less partisan arena.


For instance, the main asset held by the majority of elderly people is their home.  Despite constant attempts to, no government has yet come up with a satisfactory way to tap into this asset to fund the on-going health care issues of old age.  And yet trying to find a solution whilst essentially ring-fencing this huge proportion of the nation’s wealth is a fool’s errand.

Therefore, some form of equity release must be seen, as part of the overall package as the primary point of earning is to provide for you and as long as one can do that, then it is hard to justify why existing taxpayers should do so.  Whilst there were few older people and plenty of workers it was possible to fudge this reality but the consequences of ever-growing longevity means that the issue has to be faced before it gets completely out of control.

The cost of long-term care either in one’s own home or in specialised retirement homes is huge and cannot be resolved without tapping into the retiree’s primary wealth asset.  With the help of the life and pensions industry, new products need to be devised to ensure that the cost of providing that care does not overwhelm the state.


There is also the issue of pension freedoms.  This attempt to curry favour with the grey vote has placed the ability of the country to support the aged at great risk.  One must ask oneself what it actually means.  Originally, when forced to buy an annuity, a pension did give freedom – it gave the retiree freedom from the worry of being without an income until the day they died.  Now the freedom seems to be the opportunity to run out of money before one dies if you don’t manage to judge the market correctly or fully understand the product you are buying.

This is an area of public policy that is also best kept out of the political arena as the consequences of policy changes are felt so far down the road and short-term popular solutions are very dangerous.  What is needed is a thorough assessment of the current policy structure to see how well it is preparing the country for the situation that will arise in 2040, when a far higher proportion of the population will be in the retiree category.


The other key point is to get across to those who are entering the workforce that their retirement is likely to form a significant portion of their life.  Those in their late teens or early twenties believe they will be young forever, but age catches up on us all.  Therefore, the concept of having to earn across 40 years of a working life enough income to cover living for 60 years is something that should be introduced as part of the school curriculum.  Otherwise the drive to save won’t kick in until they are quite a bit older, when it is much harder to develop and maintain the habit and many years of benefitting from compound interest in their savings and investments has been foregone.


There are many other possibilities that could be looked at but the key point is that it cannot all be left while the Government deals with more immediate issues.  Indeed, policies for managing an ageing population are a bit like pension policies themselves – the earlier you start them the more effective they are likely to be.

There is no doubt that the Government isn’t in a position to make major moves on domestic policy at the moment.  This means it is more vital than ever to establish a cross-party committee or commission to address these issues and come up with policy options to plan for a future where there are far fewer workers to support an ever increasing old-age section of society.  The UK is going to get there anyway – it would be far better if we had a coherent plan for what to do when we arrive.

The danger is that the UK will end up where Finland is, rapidly running out of options as the burden grows heavier and the government is bereft of ideas.  The plight of the Finns is a warning to us all – populations are ageing and the devising of a long-term strategy to cope is one of the most urgent issues facing the country.  The sooner we de-politicise it and produce a broad, cohesive programme, the better.

About the author

Author Denise Garth

Denise Garth is Chief Strategy Officer responsible for leading marketing, industry relations and innovation in support of Majesco’s client centric strategy, working closely with Majesco customers, partners and the industry.