Aging and changing demographics

Never before has our planet contained so many older people, who account for such a large percentage of the total population. This places pressure on publicly funded health and pension payments, but it also offers opportunities.

THE ISSUE

Lower birth rates and increased longevity means that more of us are becoming dependent on fewer people, putting pressure on pay as you-go public pension schemes. The ‘dependency ratio’ – a calculation of those typically not in the workforce (usually taken as people who are 65 years and over), relative to those typically in the workforce – indicates that for Western societies the ratio should be one to four, or 25%. Eurostat predicts that ratios in 2060 will be close to 40% in the US, 50% in the European Union, and 73% in Japan (compared to 21%, 27.5%, and 40.5% respectively today). 

Some governments are reacting by increasing the retirement age. But while research confirms that the expected retirement age among workers in the US is above 65*, it also finds that current US retirees indicate they retired at the median age of 62 (median). The majority retired sooner than planned due to unemployment or health issues. 

Alongside governments and employers restructuring their pension arrangements, the number of self-employed, flex and contract workers are increasing. Research also shows that people are combining work with caring for children, elderly relatives or both, which can impact their savings. All of which necessitates people being more proactive in their financial planning to meet their financial needs over an extended old age.

* 58% of US employees expect to retire after 65, or do not plan to retire at all, according to the Transamerica Center for Retirement Studies (TCRS).

OUR APPROACH

At Aegon, we see it as our role to inform governments, employers and the public of the potential retirement shortfall, while acknowledging the different speeds of development in each of our markets. 

We are informed about trends, issues, and opportunities surrounding longevity, population aging and retirement security by independent research carried out by the Aegon Center for Longevity and Retirement (the Netherlands), the non-profit Transamerica Center for Retirement Studies (TCRS) (US), and the non profit Instituto de Longevidade Mongeral Aegon (Brazil).

We calculate the Aegon Retirement Readiness Index based on responses from workers in 15 countries in Europe, the Americas, Asia, and Australia. 2016 was the fifth successive year in which we have measured this index, this year’s results underscore that there is still a long way to go before retirement readiness can be declared ‘mission accomplished’. 

Changing demographics and population aging mean that people expect to live beyond 80 in many countries and retirement has become a phase of people’s lives that often lasts longer than childhood. The Aegon Retirement Readiness Survey measures peoples’ attitudes and readiness for retirement, providing recommendations for individuals, companies and governments. This is a new material issue for us, and an area we are exploring further as part of our approach to responsible business. For this reason we do not have any metrics by which we can measure progress – but we hope to develop these in the coming year.

Irrespective of age

As a company, we need to be able to pay the pensions of our customers, no matter how old they become. To do this, and as part of our strategy to enhance our risk-return profile, and improve capital efficiency, we completed a fourth longevity transaction in the Netherlands in June 2016.

This transaction builds on previous longevity deals. The hedge, covering close to €3 billion of underlying reserves, provides protection for a period of 50 years against longevity improvements above a given threshold. 

A longevity hedge is essentially a reinsurance of the risk that a customer will live beyond the pension reserves that we have accrued. Typically, longevity swaps cover older customers who are already retired, but the market is increasingly open to taking longevity risk for those who are still working. Aegon is helping to ensure pension obligations are protected for older as well as for younger participants. 

We see longevity risk management as an important part of our overall capital and risk management and will continue to manage our hedging program to match the underlying obligations.

Long-term care

Like many insurers faced with higher than anticipated claims and increased life expectancy, we are seeking price increases in our long term care (LTC) products in our US business, Transamerica. 

With many industry peers discontinuing the sale of new LTC policies altogether, we hold the view that a better approach is for people to build social care costs into their retirement plans. More flexible pensions, which give pensioners control over how much they withdraw each year, is one way to tackle the longevity and LTC challenge.