Pension Funds Insider

Pension Funds Insider brings the latest pensions news and industry insights; from investment and governance updates to new mandate appointments and pensions regulatory information.

Intergenerational Fairness

21 February 2017

Image for Intergenerational Fairness

What can be done to restore intergenerational fairness within pensions provision?

The million-dollar question: Will I be better off than my parents?

Simply put: No, not without some substantial changes to how we do things today.

The Young (Generation Y and Millennials) are saddled with student debt, facing run-away housing prices, alongside the prospect of higher taxes to fund the welfare state.

I can easily (and unfortunately) imagine a world in which they will not enjoy a similar standard of living in retirement that their parents and grandparents have become accustomed to.

The retirees of today often enjoy a generous defined benefit retirement income topped up by a triple lock state pension. Unfortunately for those joining the workforce today, this isn't and will no longer be the case.

Is this just a UK problem?

Across the pond, commentators often refer to Social Security as 'the third rail' – i.e. politicians don't dare try and change the system (or touch the third rail), as the outcome is certain death. I would argue the same hurdle stands in the way of making significant progress and change in the UK.

My Masters Dissertation was on the US Social Security System. When it was published, the general consensus from published research was that by 2040, Social Security would be paying almost $400bn more than it collects annually (clearly an unsustainable number), rendering it effectively bankrupt.

As my parents enter retirement, they will get Social Security – and they deserve it. Cynically (or prudently), I'm quite sceptical I will ever see a penny from my US government pension.

Throughout Europe, things look even more onerous. State spending (as a percentage of GDP) is set to soar in the next twenty years as governments try and honour commitments made decades before.

Just look at some of the very difficult measures that were pushed through Greece, I'd argue that this is a sign of what is to come.

Is this the age of "radical thinking"?

As we look down an unknown road, can we employ radical thinking to prevent a generation of tragedy? If so, what could radical ideas look like? Here are three for consideration:

• A country-wide reduction in benefits paid today (both corporate and government) to ensure that there is provision for younger generations;
• Mandatory enrolment in a new defined contribution savings system;
• Significant tax credits (or government transfer payments) to ensure individuals entering work are saving an adequate amount (e.g. 25%) of their salary for the next 40 years.

Is there appetite for this kind of change? I'm not so sure. In many ways, all you need to do to answer this question is to look at who goes to the polls on election day.

If the young don't start representing themselves in larger numbers, it will be impossible to enforce the intergenerational contract through the democratic process.

All Change!

'Third rail' thinking must end. Radical and politically unpalatable ideas must be considered and added to the debate.

It is the time to start brainstorming solutions. Otherwise, my fear is that in thirty years' time, history will identify this decade as the 'lost opportunity for savings'.

Yes, the LISA (Lifetime ISA) goes someway towards helping to build and support a savings culture, but falls far short of some of the measures which might be needed.

I don't think we need to scrap welfare to get there, but we need to look at it with a clean set of eyes and a fresh perspective. Exactly what and who do we want the welfare system to look after, and importantly, when?

And with the what resources? Paid for how, when and by who?

We must make conscious decisions about everything we do and cannot assume anything. This is true about world politics, how we consume resources, cohabit on this vulnerable planet and prepare for our lives in uncertain times.

We do know from history (take the great depression for example) that intensely difficult times encourage resourcefulness and the use of meaningful collaboration to make things work.

As a species, things have never been better for us, but we are facing a huge financial and lifestyle challenge. One we can actively choose to fix, or be forced to resolve.

I'd love to hear what radical ideas you think should be considered, or the merits (and drawbacks) of what I'm proposing.

Written by Stuart Breyer, Chief Executive, mallowstreet.