Stuart Price discusses how we could manage the intergenerational pension gap more effectively.
As we all know, some of the National Insurance contributions paid by those of us in work are used to pay the State Pension to those currently receiving it.
We hope that by the time we reach State Pension Age, whatever age that may be, there are enough National Insurance contributions being paid by our children to pay for our State Pension, but that's a subject for another day.
But surely, we do not pay for our parents' private pensions too? I think we do and let me explain why.
For those of us in our twenties, thirties and forties, many of our parents are from the golden generation where they are very likely to have been, for a significant period of their working life, a member of their employer's defined benefit (DB) scheme.
These schemes are now predominately closed to new entrants and us 'youngsters' must now join a defined contribution (DC) arrangement.
It is fair to say that in most, if not all cases, the contributions paid by employers into DC schemes, and hence the ultimate benefits provided from these arrangements, are substandard compared to those of their DB counterparts.
Equally, it could be argued that the reason why employer contributions to DC arrangements are so low is because of the substantial cash injections required to plug DB scheme deficits.
In an ideal world, such deficits would be non-existent, enabling employers to pay higher levels of contributions into their DC arrangements.
Hmmm?.so does this mean that we're subsidising our parents' private pensions too?
Over the years, DB schemes have had a rough time, primarily because of legislative tinkering by successive governments, leaving them riddled with extra guarantees that weren't originally in place when they were established. Whilst this is great for our parents, it does come at a cost to the younger generation (I consider myself an X by the way) who ultimately foot the bill.
The government could look to reduce, or even remove some or all of these guarantees. This might help to reduce and potentially eliminate DB scheme deficits, and at the same time up the level of employer contributions into DC schemes.
It might not make mum and dad happy but it would help address the intergenerational pension disparity we are currently experiencing. Just saying??
Written by Stuart Price FIA,Partner and Actuary at Quantum Advisory.