29 February 2016

TheCityUK: Demographics, Growth and Financial Services

• The world population is ageing; in G7 and BRICS countries, for example, the share of the population of working age is expected to decline as a share of the total population by 2100. 

• Demographic changes will pose challenges at a country level as well as for individuals. It will be important to use resources effectively in order to maintain living standards, increasing the incentives for investment in labour-saving technology. Individuals will also face increasing challenges related to pension savings and long-term care.

• Migration is likely to be one of the main drivers of population trends around the world. In the UK, for example, immigration has helped to reduce any increase in the average age of the population.

• From an economic perspective, immigration can impact growth, trade, fiscal outcomes, unemployment, wages and inequality in recipient countries. Although rising population density could pose some challenges, the evidence suggests that the economic effects of immigration on recipient countries are mostly beneficial.

• On average, both debt levels and wealth tend to follow an inverted U pattern, in line with the lifecycle hypothesis. In the UK, debt levels among all age groups has risen over time.

• Of particular note in the UK is the increasing difficulty that younger cohorts are having buying their first home, given the combination of the level of house prices relative to earnings and the stricter regulatory environment following the 2008-09 financial crisis. Large mortgages can create risks for individuals as well as banks, as the cost of servicing the debt is not linked either to their income or to house prices. This suggests that alternative risk sharing mechanisms, such as equity loans to help with the deposit, may help manage risks better.

• A key factor in helping economies adjust to the challenges of an ageing population will be to find mechanisms to help manage longevity risk; evidence suggests that individuals systematically underestimate their life expectancy relative to official estimates.

• Encouraging pension saving is an important component of government policy, because it encourages personal responsibility and reduces the need for individuals to rely on the state. The pensions sector plays an important role in providing funding for both firms and governments.

• In the context of rising life expectancy, the costs of long-term care, if needed, can be significant. Although the underwriting difficulties are significant, one question is whether the financial services industry could potentially help by providing products to help people meet these costs.

Summary of Recommendations

1. To meet the challenges posed by an ageing world population, governments will need to help economies adapt, for example, by encouraging people to work longer before retirement. Financial services will have a role to play, particularly in helping individuals to manage their wealth over their lifetime.

2. The impact of population ageing and a shrinking workforce will make it important for governments to think about how they can make their economy attractive to workers in a world of increased international mobility.

3. Shifting population patterns mean that GDP growth may not be the best measure of economic performance going forward. Therefore it will be important to emphasise other measures, such as GDP per capita, in order to get a better picture of how countries are performing. Enabling financial markets to help manage demographic risks

4. Policy stability and consistency on issues such as the future of the pension regime will be crucial for building an effective response to the challenges of an ageing society. This is particularly true for sectors such as financial services, where any engagement requires firms to take a long-term position, meaning that understanding the risks to capital is important.

5. It is important to help financial markets develop ways to manage longevity risk. Bulk buy-outs are one option, but the sector might also benefit from the use of markets in longevity hedging instruments. This is potentially an issue that markets will be able to solve themselves, but it will be important to have the right regulatory regime in place, as excessive capital requirements would damage the ability of markets to innovate.

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