Please note that this is BBC copyright and may not be reproduced or copied for any other purpose. RADIO 4 CURRENT AFFAIRS ANALYSIS A SILVER LINING TRANSCRIPT OF A RECORDED DOCUMENTARY Presenter: Diane Coyle Producer: Zareer Masani Editor: Nicola Meyrick BBC White City 201 Wood Lane London W12 7TS 020 8752 6252 Broadcast Date: 27 April 2003 Repeat Date: 30 April 2003 Tape Number: TLN311/03VT1012 Duration: 27’31” Taking part in order of appearance: Eva Pascoe Managing Director, Zoom (online fashion retailer) Sylvia Francis Project Director of the Third Age Foundation Adair Turner Chairman, Pension Commission, & Vice Chairman of Merrill Lynch David Miles Professor of Finance, Imperial College, London Mary Francis Director General of Association of British Insurers Richard Scase Professor of Organisational Behaviour, University of Kent Baroness Mary Warnock Philosopher Neil Churchill Director of Communications at Age Concern COYLE: Are you over 30? Then don’t apply to work for Eva Pascoe. PASCOE: We have problems with people past thirty, so the teams tend to be very, very young. But I don’t see the technology slowing down enough for the older people to get the advantage back. The emphasis on getting productivity is strong and the productivity is gained better from younger people. So I think overall there is a general trend towards replacement of people who are retiring with very young people, because they are the ones who are the most au fait with technology and they can identify the areas where it’s feasible to gain productivity. COYLE: She’s Managing Director of the online fashion retailer Zoom, where any employee older than 30 is a bit of a liability. But Sylvia Francis, Project Director of the Third Age Foundation which retrains the over-40s, sees older folk as an undervalued asset. FRANCIS: People in their fifties and sixties, once they have actually been shown how to do the information technology, they are actually just as good as youngsters. And they bring other things: they bring wisdom, they bring knowledge, they bring experience, discipline, they’re punctual, they’re loyal. They do all these things. COYLE: Who’s right? Has the ageing of our population lit a slow-burning fuse on economic stagnation and technological decline? Or are we exaggerating the so-called demographic time bomb, the inevitable increase in the proportion of older people in the population in the decades ahead due to longer lives and lower birth-rates? Could a greyer workforce even be an unexpected advantage? The view from e-commerce executive Eva Pascoe, at the cutting edge of the new economy, is that future productivity gains depend on youth, not experience. PASCOE: The e-commerce sales this year were over one billion comparing to seven hundred million last year, so almost … well thirty percent increase. But the employment levels in e-commerce stayed the same, which means that the productivity gains have been absolutely enormous. And I think for the next decade – if not more – we will see these performance gains coming our end, but they come from younger people. COYLE: So, in effect, what you’re saying is that if you can get ten years of growth in your business with the same size of workforce of young people, then why should we be worrying about employing the older people; we should in some sense be able to finance their happy retirement? PASCOE: I agree, I think this is very much the way it’s going because younger people are entrepreneurial enough and they can commit you know a sixteen, eighteen hours working day for seven, eight years without any problem. But you can only do it really up to a point, then when you start a family you don’t really want to work those sort of crazy hours. My view is that one should retire at the point of having a family, and I think technology could probably help us to do it, to at least understand that the peak productivity of a human life is probably pre-family. COYLE: The suggestion that we should retire at thirty might sound appealing but it’s an extreme view from a high-tech business. Even so, there has been a trend towards earlier and earlier retirement across all industries in Europe. Men are retiring about two years earlier, on average, than they did in 1970. Then, ninety five men out of every hundred in Britain were still working full-time at the age of 65, but now only five in a hundred stick it out until the formal retirement age – an age at which men can expect to live another fifteen and a half years, and women nearly 20 years. Until recently, such a long retirement looked affordable because in the early 1990s many pension funds had a financial surplus. TURNER: Part of what was going on there was actually driven by some perverse incentives which existed because of the way we accounted for pension funds and because pension funds were in surplus. COYLE: Adair Turner, Vice Chairman of the investment bank Merrill Lynch, is chairing an independent Pension Commission set up recently by the government to look at the affordability of pensions. TURNER: If you were downsizing middle management layers in ‘90 to ‘92, it appeared much cheaper to offer a fifty-one year old an early retirement deal than to give redundancy to a forty-five year old because there was this wonderful thing called the pension fund, which was in surplus. And in some magic way that appeared costless to everybody you gave somebody a deal which had no impact on the accounting earnings and as far as people could work out was costless. Well actually it wasn’t costless because we’re facing the costs of those deals right now in the pension fund deficits. COYLE: Those costs are alarming: many pension funds now don’t have enough money to meet all their future obligations. The number of employees paying into the funds is shrinking relative to the number of retired people looking forward to many years of drawing a generous pension linked to their final salary. Almost half of all final salary schemes in the private sector have been closed to new members during the past few years. Some have even been wound up altogether. More and more of us won’t be able to enjoy that traditional link between pension and salary on retirement at all, instead receiving an unpredictable pension that depends on how much we’ve paid in over our working life, and on how well that money gets invested. So a growing number of pensioners, possibly millions, are looking ahead to a quarter of a century of old age with a question mark over their retirement income. No wonder opinion polls show pensions have become our fourth biggest concern, after health, education and law and order. But is that just the result of bad planning, or is it a demographic crisis? MILES: The scale of ageing in the UK is significantly lower than in many other developed economies - in particular Japan, Germany, Italy and Spain. Furthermore, the level of state pensions in the UK is low relative to levels in those other countries. And therefore, given projections of the likely demographics in the future, there really isn’t a problem for the government in terms of the overall affordability of the State Pensions Bill. COYLE: Professor David Miles of Imperial College, London, is an authority on the financing of pensions. MILES: Sensible projections suggest that something like five or six percent of GDP is what the government is likely going to be spending on pension support for old people in the future pretty much as far ahead as you look, and that’s not very different from levels of spending now. So the whole idea that there’s some sort of crisis of affordability in the state pension system stemming from ageing is just quite wrong-headed. COYLE: What’s puzzling I suppose about it is that we’re a very rich country that’s getting more prosperous as time goes by, the economy is growing, and it would seem natural to suppose that we can afford to pay for a longer retirement as we get richer. Why does it seem to have gone wrong? MILES: Well I’m not sure it’s gone all that wrong. What’s happened in the last few years, of course, is that the rates of return on the main class of assets held in company pensions have done tremendously badly. The stock market has had a terrible two or three years and that’s wiped out a big chunk of value in company pension schemes. It’s meant that companies will probably have to chip in some more money and they may cut back slightly the generosity of occupational pension schemes in future. Now that’s unfortunate now in the kind of sober middle of 2003, we realize that we were never perhaps as well off as it seemed. But that’s not really a crisis of pensions. COYLE: But even if plunging stock markets recover, surely the funds accumulated for pensions are going to have to be a great deal bigger to cover both earlier retirement and a longer life. MARY FRANCIS: Probably as a society we’ve been encouraging people to think they can have their cake and eat it, and the fact is that you can’t any longer. COYLE: Mary Francis, Director General of the Association of British Insurers, the trade organisation for big pension funds. MARY FRANCIS: People are starting work later, as they get more educated; they have been leaving work earlier and they’re living longer; and at the same time, the government is saying that it’s going to offer less generous a state pension. So if you put all those things together, they just don’t add up. And there is a gap between what we’re all saving for retirement and what’s going to give us a decent income in retirement. COYLE: Do you think that the pension fund industry has in a sense fuelled people’s illusions about how long and how luxuriously they can be retired? MARY FRANCIS: Actually, I think the first body that has fuelled people’s expectations about having a generous retirement is the state. I think in the past we have expected that it’s the government and the taxpayer who are going to look after us, and we’re being weaned away from that expectation and it’s rather a painful process. But I do agree that while stock markets have been booming, perhaps there’s also been an expectation that it’s easy to save for a pension and that you don’t have to forego current living standards in order to save enough for the future. COYLE: Now those of us still working will have to get used to the idea that we need to save more out of today’s income to provide for tomorrow. The government isn’t going to take us back to the golden age when the state pension was increased in line with earnings. But can this savings gap be bridged given the fact that by 2050 there’ll be only two people of prime working age supporting every person over 65, compared with four per old person today? Not only are we living longer, but the birth rate has declined to 1.7 children per woman on average, below the replacement rate of just over 2 children which would keep the population constant. Isn’t the demographic time bomb ticking? Professor David Miles. MILES: I think this is an area where there is a huge amount of misunderstanding and misconception. There’s a perception amongst some commentators that low fertility rates may well mean that populations in many European countries decline and that is inevitably bad for the economy – that there will be stagnation, that Europe will slip back. That seems to me almost exactly the opposite of the truth. There’s a confusion between the overall level of GDP and the level of GDP per person, per capita. What we should be really worried about is what happens to the level of resources relative to the population, the level of per capita income that’s available to the citizens of a country. And it seems to me there that there are strong reasons to believe that a slow-growing population, even a declining population could well be one in which the average standards of living in the population rise more rapidly than would be the case if population were to continue rising at typical average rates in the past one hundred years. Furthermore, for countries that have limited land availability, that are relatively small, densely populated countries – and the UK is most certainly one such country – there’s an obvious benefit from having a population that grows more slowly, or even declines, which is that we have less congestion, there’s more space, house prices can be somewhat lower, land prices can be lower. That is a real benefit. It’s not a feature that tends to show up in GDP type comparisons, but it certainly is something that will enter into a quality of life index. COYLE: The verdict on quality of life will depend on how the benefits of our slower-growing and older population weigh against the costs. Professor Richard Scase of the University of Kent, has carried out a major study of the over-50s for the Economic and Social Research Council. SCASE: The issue of the time bomb I think has been in a sense grossly over-exaggerated because to be old now is very different compared with, shall we say, twenty or thirty years ago in the industrial economy when people … the majority of the labour force were in manufacturing, they were working in heavy industry. Clearly working thirty or forty years in those industries literally exhausted people physically as well as mentally. But now, as a information based economy where a very small proportion of the labour force are doing very demanding manual tasks, because of an increase in life expectancy as well – people are fitter, people are healthier – calculations in terms of how the ageing in the population is going to put increased demands on the health and welfare system, I think have been greatly over-exaggerated. They are projections based on past trends. Increase in life expectancy okay on the one hand will create demands on the health and welfare system of the state in terms of the need for hip replacement operations and those sorts of demands but, on the other hand, the far more active, self-confident, older person will neutralise some of those increased demands. COYLE: It’s almost enough to make a youngster of 30 or 40 look forward to getting a free bus pass. But this optimism still leaves open the question of whether all these youthful, vigorous sixty-somethings can continue to opt out of the workforce ever-earlier than their less energetic predecessors. Surely if we’re likely to be fitter for longer, there’s every reason to work longer too – especially when the alternative is less income? Adair Turner, heading the Pension Commission, sees a fundamental equation operating here. TURNER: Under any pension system those people in retirement are fundamentally supported by those people in work – the money flows from workers to pensioners. So if there are more pensioners to more workers, one of three things will have to happen: you either have to have pensioners poorer in retirement; you have to have workers making a larger contribution out of their income to their future pensions or to the present pensions, of existing pensioners; or you have to increase the retirement age. I certainly think that an increase in the retirement age or the average retirement age is likely to be part of the overall solution that people would rationally choose. COYLE: It isn’t only a question of financial pressure, though, according to Mary Warnock - philosopher, working peer, and a member of advisory committees on subjects ranging from education to bio-ethics since she retired as Mistress of Girton College, Cambridge nearly a decade ago. WARNOCK: Well I can’t imagine anyone who doesn’t want to carry on working. I mean I really think that most people suffer greatly when they retire from the change in their way of life from not having anything to get them out of bed in the morning. And however good they are at cultivating their gardens and listening to opera and reading open university degrees and all those good things that the retired are meant to do, I still think that they greatly miss their job, their status, the companionship and all those things. COYLE: The very concept of a retirement age, does it make sense or not or is it just some historical aberration? WARNOCK: I think it’s a historical aberration, I must say. I don’t think it has much relevance to how things are now. I think in general it would be very much better if people could make their own decisions about retiring, yes, but I suppose we’ll always have fixed rules. But some of the fixed rules are absolutely ridiculous, in my view - I mean the rule that you can’t stay in the Civil Service after sixty, or teachers have to retire at sixty. People do age mentally at very different stages, and I think this is something which is very difficult to take into account when you have fixed rules of what time people should go. On the other hand, it gets over the embarrassment of saying to someone “You know you’re going ga-ga, you’d better be out tomorrow.” But I simply think the fixed rules ought to be pitched up a bit higher than they are now. COYLE: Do you think it would be possible to devise some kind of test for determining who is allowed to carry on working, which civil servants can stay on until they’re seventy-five? WARNOCK: I think it would be very unpopular, but I think it would be also in theory a very good idea. And you could get the doctor to take the responsibility of saying “Well really he’s not up to it.” COYLE: So why, then, have more and more people been opting to retire before the rules insist on it? They’re not waiting to fail their old-age MOT, but choosing to stop early. Or are they? Professor Richard Scase. SCASE: To use the term ‘retirement’ really is a wrong concept. It’s people who are quitting the labour market because they’re sick of working according to performance targets and by the time they get to their early fifties they’ve had enough, they want to quit the pressures of target-driven management. But it doesn’t mean to say they want to retire; they want to do other things. People who quit their jobs in their mid-fifties see it as release. They see themselves as having a future, whereas in the past when you were in your late fifties, early sixties, you may have perhaps seen yourself as coming to an end, you know it was a kind of preparation for death in a sense. And of course life expectancy was late sixties and once you’d done your forty years working in the coal mines, working in the steel factories, etcetera, you weren’t likely to live much after your late sixties and you were physically exhausted, you couldn’t really do much other than sit around in the armchair. COYLE: The switch from having no life expectancy beyond retirement age to having decades to look forward to is profound. Only about half of British men and a third of women are still in formal employment at the age of 60. Many of them leave early because they can afford to, but their pent-up energy and ambition, stifled by the nine-to-five routines of the job up to that age, needs a productive outlet. And might be finding it. SCASE: Older employees can be just as adaptive, can be just as flexible, and the data we have looking at the take up of new technology shows that amongst men who take early retirement in their fifties, one of the first things they do is develop internet skills and develop computer skills because they need it for their various hobbies. And also what we do have that’s happening, which again makes me somewhat cynical about the demographic time bomb, is that people in their sixties, although they’re not registered as doing part-time jobs, although formally they may not be acquiring earnings, a large number of them are having sources of income which are not formally declared. We almost have a grey economy amongst those in their sixties. They’re doing part-time jobs, they’re being paid cash. There is quite a thriving, informal, hidden economy amongst those older people. COYLE: This sounds ideal: retirement as a release from the drudgery of office life, an opportunity to learn new skills, take new risks, perhaps work part time to supplement the pension with a bit of extra cash. If it’s so exciting, perhaps it’s too good to be true. After all, it’s only the lucky few, those who’ve enjoyed a reasonably high salary in white-collar jobs, who have the energy and incentives to take flexible retirement. What about factory workers, cleaners or dinner ladies? WARNOCK: Absolutely, I mean I think you’re absolutely right. It’s the professional people who miss their job and feel they haven’t got much point if they’re not doing it. COYLE: Mary Warnock. WARNOCK: I think that if you’ve been doing a tedious, repetitive job, you must be longing to get out of it. But then the question is, what do you actually do? And I think that is really quite problematic because if you’ve had a job that hasn’t really stretched you particularly and hasn’t involved you in decision-making or anything, but you’ve just worked the till at Tesco’s – not every Tesco till-keeper is a budding opera singer – so in fact I think there then is a great problem: what on earth you do do with your retirement. I think you just simply watch television when you’re not doing your boring job and that is a very, very gloomy prospect, I think. COYLE: What should we be thinking about doing with these people? Should we think about retraining them? Should they be doing voluntary work in their old age? WARNOCK: I feel very queasy about voluntary work in old age. I feel queasy about voluntary work altogether, because it’s very difficult to have the same commitment to voluntary work as one has to paid work. So I think ideally if people get bored with doing nothing, it would be very good to find probably again quite tedious work that’s paid a little – not enough to affect their pension really, but just a little. And, after all, there are masses of people like jobbing gardeners and people who cut down trees and things who go on working till their eighties but you pay them in cash. It’s a well-known sub-culture and a very beneficial one, I think, because it keeps everybody happy. COYLE: Whether you’re a philosopher or a manual worker, how you spend your retirement ought to be a matter of personal choice. Some people might enjoy watching TV, some have hobbies or will help out the younger generation with childcare, and others would like a part-time job. The trouble is that current pension rules make some of these choices unattractive. At present even part-time work means a loss of state retirement income. The government’s green paper on pensions, a discussion document published in December, acknowledged that there isn’t enough flexibility. It proposed, as well as abolishing compulsory retirement at 65, introducing more choice in the way people are allowed to receive their pension payments when they do stop working. Adair Turner, charged by the government with monitoring the pension system and drawing up further reforms if they’re needed, thinks the rules are already less rigid than people realise. TURNER: Nobody tells you to retire at sixty-five and there are lots and lots of people who actually retire before sixty-five. There is no complete link between the state pension eligibility age, which happens to be sixty-five for men and will be sixty-five for women by 2020, and the age of retirement. So we already have a variable age of retirement, and I think that is the way we will increasingly go. The key thing is for people to make informed choices. And I think those informed choices will probably involve fewer people retiring at say mid-fifties than retired during the ‘80s and ‘90s, because I think some of them were retiring then on the basis of defined benefit deals given by pension funds in surplus which even if we manage (as would be attractive) to maintain a significant amount of defined benefit within the system, that sort of deal is not going to be available in the future in the way that it was in the past. COYLE: So the good old days of over-generous pension funds are gone forever. But without an adequate retirement pension, choice is a fiction. It’s either continue working or live in poverty on a minimum state pension. Would more generous state benefits, like those on offer in some other European countries, help or hinder choice and flexibility? Neil Churchill, Director of Communications at the charity Age Concern. CHURCHILL: There clearly is a danger that if you make pensions more generous that it will encourage more people to retire. But it’s not as simple as that. There are significant cultural factors at work here. So we can look at the case of Scandinavia where we see that despite a very generous public pension system they have some of the highest participation rates of older workers in the labour market. By contrast, if you look at parts of continental Europe, who still have quite generous public pension systems, they have very low participation rates. And then again in the UK somewhere in the middle despite the fact that we have a very poor public pension system that really just gets people about a minimum level. COYLE: How much do the cultural factors, the attitudes to retirement differ between the different countries? CHURCHILL: The European Union has polled people in different countries about their attitudes to work. If you take a question like who should decide when you should retire and at what point should you retire, there are very significant differences. And what you find in a lot of continental Europe is that people should retire early, they should give younger people an opportunity to come into the labour market and, ultimately, early retirement should be seen as something of a right. In the UK, it’s very different. People are very clear here that the decision about when you should retire should be up to you as an individual. And people can see actually that the more people we have in work, the faster the economy will grow, and the more jobs will be created. Work is important to people in the UK. It brings people social networks, it brings people status, it brings people income and people want to have that choice. COYLE: A useful reminder that although the financial incentives in the pension system are important, they’re not the only influence on people’s decisions. Of course, it’s easier for us in Britain to choose work over retirement because we have relatively low unemployment. Those European countries with a cultural preference for early retirement also have the highest unemployment, the most rapidly ageing populations, and a pensions bill which could therefore spiral out of control. Mary Francis of the Association of British Insurers thinks we’re luckier. MARY FRANCIS: We have scaled down the amount of money that comes out of the tax system for pensions so that we’ve got a sustainable public finance system looking forward and we’ve also got people more into the habit of saving through private pension companies or through their employers. In many other countries, the outlook is a lot worse: there’s going to be a far heavier weight of pensioner population to working population and at the moment they’re very accustomed to looking to the state to finance their retirement income. So we’re better off than most, but we’ve still got some quite tough problems to crack. COYLE: How are we going to encourage people to save more for their retirement when young people, after all, have a lot of things they want to spend money on and being seventy seems a very long way away when you’re thirty? MARY FRANCIS: Absolutely, I can just about remember that. One alternative is to frighten people. And that requires governments to be absolutely firm that they are not going to provide sufficient income for people in retirement out of the state pension and so people are literally frightened into saving enough. I don’t honestly believe that any government is going to be prepared to do that and to stick by the threat of not giving people decent state pensions, so I don’t think that works. The other alternative is to give people fairly generous incentives to save, and that’s what our tax system does to some extent at the moment: you can put into your pension from tax free income up to a certain limit and that’ll continue. What we have said from my Association is that we’re not seeing that doing enough to bridge the savings gap, and we believe that the government will need to put more incentives into the tax system, to be more generous to people either individually or to their employers. COYLE: In Britain our choices about when and how to retire are going to be far less constrained than elsewhere in Europe. But we too are going to have to adjust to the shrinking proportion of younger people in the population. The vital change will be getting into the habit of saving much more for the long term at that stage of our lives when we’re at our most productive but also face pressing financial demands from setting up home or starting a family. Most of us will choose to supplement the extra saving by working beyond the now-youthful age of 60. That’s no bad thing when you’ll probably still have another quarter century of opportunity ahead. WARNOCK: Although I’m nearly eighty, I would allow that old age starts at eighty. But I would hate to lump all the people from sixty onwards as old age pensioners as if there were no difference between being sixty and being ninety. It really is absurd. I think of people of sixty as a mere chicken. I think it’s really true that an awful lot of talent is wasted in the twenty years following retirement. I think it would be very helpful if there were a concept of a third age and then the old could start being old at eighty. COYLE: And perhaps not even then in Mary Warnock’s case. Longer, healthier lives are good for all of us, and good for the economy.