The demographics of the UK are changing. The Baby Boomer generation (born 1946 to 1964) has remained consistently the largest generational cohort until 2024 when it was overtaken by Gen Z (born 1997 – 2012). In that year, there were approximately 13.4 million Baby Boomers compared to 13.6 million Gen Zers. The median age of the population is expected to reach 44.5 by 2050, compared to 34.9 years in 1950 and, by that date, the over-65s are expected to make up a quarter of the population.
These changes have serious implications for the future prosperity and functionality of the UK, with a greater percentage of older voters and a decrease in younger ones adding to falling fertility rates, greater longevity and increased socio-economic inequalities. They will also impact on workforce participation and long-term wealth distribution and place pressures on financial systems, in particular, pensions and public finances.
These structural drivers are not a distant future concern, they’re already influencing corporate investment and forcing many insurers into a rethink of their pension liabilities and consumer expectations. Here we look at how these slow-moving but powerful trends will influence long-term financial strategy.
With the number of the over-65s rising steadily, the UK is seeing a sustained demographic shift towards an older population. This has been driven by increased life expectancy and historically low birth rates which now stand at 1.39 children per woman.
This long-term transition, in which older age groups are growing faster than those of working age, dramatically increases pressure on economic output and public finances, creates a structural change in the economy and changes the balance between:
The increasing age of the population has changed the country and resulted in a higher dependency ratio, meaning that fewer workers support more pensioners over time, placing more pressure on both public finances and private provision.
For insurers wishing to plan their long-term financial strategy this is of vital importance, altering the balance between workers and those people who have retired and making traditional assumptions involving labour force expansion less reliable.
Two of the most immediate and serious consequences of demographic ageing are the pressure on pension systems and the rising cost of retirement provision. As people live longer and retirement lasts for many more years, the costs of providing an income for retirees in later life increases. The Bank of England has frequently highlighted that longer life expectancy has the effect of increasing the need for either higher retirement savings or a later retirement age (which may include working longer or accepting a less affluent retirement) in order to maintain financial sustainability. This increases the liabilities for both public pension systems and private pension providers.
The IFS has also highlighted that an ageing population creates long-term fiscal strain on both state and private pension schemes through both higher spending commitments and a smaller tax base, relative to demand, much like the government of Japan is seeing at the moment.
The key implications of this include:
As a result of increased life expectancy, pension strategy is shifting towards sustainability over decades, rather than years, and financial systems must adjust either contributions, benefits or retirement ages in order to remain financially viable.
Demographic changes are also reshaping the supply of labour across the UK. Research from the IFS has shown that employment rates decline sharply after the age of 55 and reduces even further after people reach the state pension age. This creates structural pressures surrounding the number of young people entering the workforce relative to their older cohorts leaving employment or reducing their hours and tightens labour conditions in many sectors.
The Bank of England has also raised concerns that weak labour force participation as well as demographic ageing is impacting on UK growth and economic performance. This will result in several challenges for those organisations planning long-term financial strategies:
The availability of labour is becoming a key constraint in financial forecasting and business planning.
An increasing demographic trend is the uneven distribution of wealth between different age groups. Wealth is now largely concentrated among older age groups because of, according to the IFS, the growth in equity in housing, long-term asset appreciation and pension accumulation.
This creates what’s described as ‘wealth lock-in’ and has long-term effects on the financial system:
For those involved in long-term financial strategy, this affects:
Over time, as wealth gradually transfers between generations, financial institutions are increasingly having to adapt products and services to support this trend of intergenerational planning, which is expected to become one of the largest financial transfers in the economy.
As the population ages, demand for healthcare, social care and retirement services grows. Conversely, education and sectors that depend on young people are reduced. This leads to a structural change in economic demand and consumer markets.
The sectors which experience increased demand include:
The sectors which experience slower growth include:
For financial planners and long-term investors, understanding these changes is vital when considering both revenue growth expectations and sector allocation decisions.
A key result of demographic change such as this is that as population growth slows down, economic expansion in the future becomes increasingly dependent on improvements to productivity rather than an expansion in the labour force. The Bank of England was warning about the impacts of an ageing population reducing labour force growth and, therefore, increasing reliance on productivity improvements to sustain the UK’s GDP growth back in 2002.
This shift to increased productivity is already influencing capital allocation decisions across the economy and is likely to result in:
It’s vital, therefore, that institutional investors and corporate strategists factor demographic trends into their long-term portfolio strategy.
The changing nature of UK demographics is not a short-term, temporary economic cycle but rather a long-term structural transformation that will impact and influence both financial strategy and the UK economy for decades.
The key indicators include:
The Bank of England and the IFS have already highlighted that demographic change is taking place right now, is largely irreversible and will continue to shape UK economic outlook for decades to come. The challenge for financial strategists, organisations, investors and policymakers now is to align long-term planning with demographic reality rather than rely on traditional historic assumptions.
If you’d like to discuss any of the issues raised here, contact us.