THE BIG INTERVIEW Who wants to live forever?
For all the attention given to the millennial generation, increased life expectancy is arguably of even greater significance for many developed economies.
As a professor of economics at London Business School and co-author of the best-selling and award-winning book, The 100-Year Life, Andrew Scott is passionate about ensuring the gift of extra years becomes just that, and not a curse.
In addition to his academic work, Scott has for many years been a trusted adviser to policymakers; including the UK Financial Services Authority, House of Commons Treasury Select Committee, Bank of England, HM Treasury and the Office for Budget Responsibility. As such, his views on longevity carry weight.
In a lengthy interview with AIQ, Scott discussed the disintegration of the three-stage life and laid out a case for the shift towards a more fluid, multi-stage life. In order to live a ‘good’ life, he argues “you have to think about four different assets, and only one of them is financial”. The other, less obvious, three are productivity and knowledge; vitality; and transformation – in other words, the ability to deal with change.
His theories imply financial advisers will need to evolve into holistic life planners in order to really serve their clients’ needs; while servicing a growing number of elderly civilians will also have major consequences for entire industries.
According to Scott, technology will play a critical role in enabling societies to find and implement the necessary solutions. The challenges ahead are clearly manifold. However, his message is inherently positive: if individuals, companies and policymakers embrace this inevitable trend, the potential for more fulfilling and enjoyable lives seems unlimited.
Which demographic is feeling the greatest impact from the shift to a multi-stage life?
Increasing longevity is already disrupting the life-cycle model that emerged in the 20th century. The three-stage life of education, work and retirement – which was based on a life expectancy of around 70 – is unlikely to be able to cope with the real possibility that the next generation will live to between 95 and 100.
The people who will be most affected by these changes are in their 60s. Many enjoy a level of health and fitness that is, on average, much higher than what was expected when the idea of a three-stage life was born. In their desire to carry on working, it is almost as if they have set aside the notion of retirement. The idea there is a single age at which everyone comes to a hard stop is already outdated.
Retirement is almost coming into three stages now: one where people are still working; one where they are fit and healthy and travel and have some fun; and one that looks more like a traditional end-of-life stage, where they are more fragile and stay at home.
We are also seeing people in their 20s acting very differently. They are getting married later, buying a house later and having children later. A woman is more likely to have a child in her 40s than when she is under 20, which I think is an extraordinary statistic. Some of this is a consequence of negative factors, notably student debt and high house prices. But lifestyle choices also play a role, with many people adopting the full range of adult responsibilities in their early 30s rather than their early 20s.
How should companies respond to the demographic shift?
They should embrace it. One thing I tell businesses is that a 65-year-old today is very different from a 65-year-old in the past. They are fitter, healthier, more productive and work for longer. In 1922, a 65-year-old British male had a mortality risk, or chance of dying, of 4.3 per cent. Today that is down to 1.3 per cent. The question is who in 1922 had a 1.3 per cent mortality risk? The answer is 52-year-olds: 65-year-olds today are the equivalent of 52-year-olds in 1922.
Companies need to do more work in the formalisation of their relationships with employees reaching retirement age. Options need to be set out five or six years ahead of time so that they can make choices. And with the mass of the baby-boomer generation now moving into retirement, firms have to be more systematic and less discretionary in their policies: they could risk litigation if they are seen to treat individual employees differently.
The idea there is a single age at which everyone comes to a hard stop is already outdated
How can we address the growing inequality in life expectancy?
Healthy life expectancy is not equally distributed across society. We see it much more in the middle classes and higher-income groups. This is a massive challenge because there is probably about a 14-year life expectancy gap between the top and bottom 10 per cent. That has to be resolved.
The first thing to note is that the rate of increase in UK life expectancy, and the US too, has been slowing; in fact, it has slightly dipped the last couple of years in the US. That is very much about inequality. In the US, you have this terrible opiate crisis. In the UK, though it is still too early to know for sure, there is wide suspicion that issues around austerity have had a role to play.
The other interesting issue is if you look at data on physical work, understandably the longer people work in a physical activity, the less their life expectancy. White-collar workers are exactly the other way around. You have to dig very deep to find out truly what the connection is, but there is an obvious interpretation: one is physical work is challenging and life-diminishing, but purpose and social activity is important also for maintaining life.
In terms of addressing this, the first issue to tackle is health reform, which is difficult but should be possible. The second is how we support people who do not have sufficient resources. If we look at the history of the welfare state over the 20th century, we see the advent of unemployment insurance and maternity and paternity leave. These are examples of the government eventually offering some sort of scheme that was previously only available to the rich.
Looking ahead, we could see developments in education provision. A government could, for example, fund a year’s worth of retraining that could be taken at any time over the course of a lifetime. While this would be most likely offered to everyone, the uptake would be mainly from those on lower incomes.
Depending on your view, technology is either a major threat to employment or a positive trend that can create new jobs. What’s your perspective?
When I talk to an audience in their early 40s, I usually depress them a little by saying: “You probably have more years left in employment than you have done already.” That is great way of getting people to sit up and say: “I need to really think. Am I enjoying my job? Will my job last? Do I need to upgrade my skills?” This is technology as a threat.
Of course, we have had many new technologies before. There is a big debate about whether it is different this time but, as a rule, technologies make countries and people better off in the long run. In the short run, it leads to a lot of redistribution, with some people gaining and others losing. Although most people find a new job in the end, they suffer during that period because they have a lower income and the psychological anxiety associated with change. So while technological innovation can only be good news over the long term, there will be challenges along the way.
In terms of opportunities, we always think in terms of the technology of networks; the digital world; robots and artificial intelligence. But we should also note the prospect of a massive improvement in healthcare. We are seeing already some quite stunning products around anti-ageing and life extension.
Another interesting aspect of technology is that we decry the use of robots, even though there are clearly numerous benefits for utilising them. If, for example, we look at data for South Korea and Japan, which have some of the most rapidly-ageing societies, their productivity growth has held up better than many other countries. This is largely because of their significant investment in robots. If your workforce is ageing and you have robots to do some of the difficult manual tasks, it is obviously going to be a big positive.
Companies and governments need to move away from thinking in terms of a three-stage life, which so hardwires our actions
If people have to work longer, presumably education has a key role to play?
I believe we are going to see a greater need for education of 40 and 50-year-olds. Technology will play an increasingly important role in that process as I do not see universities being able to cater for all that extra demand. I expect to see new products and new providers, with digital being the best way of delivering them.
We also need to bear in mind that education should be about more than just upgrading skills. It also has to be transformational. All the evidence on transformational education is that it is about being part of the community, being opened up to new ideas and being isolated from your other life.
While I think that is one of the big roles of education for 18 to 21-year-olds, it will also be important for those in their 40s and 50s because they are likely to have had 20 years working in just one role. That is their skill set and their identity. They probably do not even know what they really want to do. You can sign up for a course to do web design or something and that is great. You can learn to be a very good web designer but it is not going to be totally transformative in your outlook and your skills.
How should financial planning adapt to a multi-stage life?
If we are right that we are going to have a multi-stage life, we need to question the whole concept of a pension because of our need for assets at different times of our lives. I might, for example, accumulate a lot of money at my financial stage in order to fund a couple of years of retraining. Alternatively, I may opt to get a job where I do not touch my assets but only earn enough to wash my face financially, which we see a lot of among people in their 60s.
There is a whole covariance of assets we now need to look at: health, relationships, education as well as work. This means we need to think differently about when we shuffle money from one period to another. That is also going to be much more individualistic. A three-stage life can only be arranged in one way: I get educated, have a job and retire. You can arrange a multi-stage life in lots of ways. Again, different people have different needs. The best financial advisers will ask their clients what they really want and are able to help them achieve that.
Should pension freedoms be extended then?
With low real rates of return, greater longevity and the removal of tax incentives, it is a very challenging world for pensions. Pension freedom is in principle a good idea but it all comes back to the question of financial advice and what you tell people to do. The danger is encouraging short-term behaviour, which is one of the biggest challenges of the 100-year life. Self-control and drawing a link between yourself now and the future is key for a long life. The question is how we educate people to have that long-term perspective.
I expect to see whole new frameworks for long-term wealth management, where you can distribute the tax advantage over the course of your life. To that end, we are now seeing interesting new options such as the Lifetime ISA. Rather than just having a tax allowance for an end-of-life pension, there will be something that you can use at different points of your life. That seems a sensible way of looking at things.
How should corporate pension schemes respond?
Most companies are pulling out of defined benefit pensions given their high cost and significant longevity risk. Few firms are still admitting members and overall membership has declined dramatically. That said, while the defined benefit scheme in its current form is no longer viable, there is a version of it that could work well for the 100-year life.
If you think of your assets as not just financial, then the company could say to its employees: “We will give you auto-enrolment or some small-scale defined contribution up to a certain level but after five years we will give you a six-month sabbatical. After 10 years, we will give you a one-year sabbatical. We will pay for you to go and get retrained and, if you agree, we will move you into a different part of the team.”
A more holistic approach to thinking about corporate pensions could also help reinstate the original advantage of offering a defined benefit scheme: we can hire someone today for less than we might do otherwise and use it as a retention tool.
Is a sense of purpose as important as financial well-being over the course of a long retirement?
This is arguably the greatest problem we face. We have to recalibrate what we mean by ‘old’. I do not think 65 can be counted as old anymore and as the years pass I get more passionate in saying that. Also, we need to think about how to reintegrate older people back into society because the three-stage life creates a type of ‘age apartheid’. It leads to a society where young people stay together, working age people stay together and old people stay together.
Helping the older generation retain a sense of purpose is vital as there is clear evidence that purpose produces happiness. There are two ways of achieving this. The first is for people in their 60s to be entrepreneurial, which is something I am seeing more and more. They want a work-life balance rather than simply to make money. The second is for older people to supplement their main career with professional mentoring. According to the US organisation Encore, which runs such a service, inspiring and motivating others by imparting knowledge and experience can have a profound impact on those who participate.
What are the investment implications of all of this?
In terms of sectors, I think the recent merger between CVS and Aetna in the US is really interesting. Healthcare has now been retailed, but it is going to be a lot more than just selling products. There are a lot of services to be combined. Then, of course, education. When we do some calculations for people over 18, they are probably going to be working into their late 70s. Nothing you learn at 21 can possibly last for that length of time. There is going to be a big growth of education, I think, in the 40 to 50-year age bracket.
What one thing you would say that individuals, companies and governments separately need to do to meet the challenge of the multi-stage 100-year life?
For individuals, I worry most about 40 to 50-year-olds. They are following a model that worked for their parents but will not work for them. They cannot retire at 65 but their education and skills will not sustain them beyond that. That is a really big challenge. For individuals in general, it is important they recognise the need to think about their future self today, but also acknowledge their future self will go through several changes. They need to be open to those changes.
Companies and governments also need to move away from thinking in terms of a three-stage life, which so hardwires our actions, and realise we are going to see a lot more diversity and a lot more of a lifetime approach to things.
As for companies individually, they will miss an opportunity if they do not accommodate with appropriate options the very large and highly-experienced baby-boomer cohort currently approaching retirement. I find it slightly strange how obsessed companies are with millennials. While they might be great in number, there is an even bigger cohort about to walk out the door who seem to be fit, healthy and laden with expertise.
Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 16 January, 2018. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
Education should be about more than just upgrading skills. It also has to be transformational