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False expectations

13 October 2016

Today’s golden age of pensions could be masking problems for future generations of retirees.

A new report from pension firm Aegon shows that average pensioner incomes have almost doubled in the last twenty years, rising from £155 per week in 1995 to £297 in 2015. Even more remarkably, the weekly incomes of pensioners are today only 7% behind those of the working population1.

Seemingly, there has never been a better time to be retired. Generous benefits accrued in final salary (defined benefit or ‘DB’) pension schemes, combined with higher-than-inflation rises to the state pension, have led to a revolution in pensioner wealth. In 1979, 43% of those on the lowest incomes in society were pensioners. Today that figure has fallen to just 13%2.

Yet it is likely that future generations will struggle to match the levels of comfort enjoyed by today’s pensioners. Well over half (57%) of people aged between 50 and 64 are worried they will run out of money during retirement. This compares to just 37% of over 65s1.

Faced with high living costs and mortgage commitments spread over longer timeframes, 92% of those aged 45-49 and 89% of those aged 50-65 report that their ability to save for retirement is restricted, despite these often being peak-earning years.1

On top of this, very few private sector employees are still building defined benefit (DB) pensions that promise a generous and highly predictable income in retirement. These have been replaced with defined contribution (DC) schemes that pass both investment risk and the onus for decision making on to the individual.

Locked in

While Theresa May has reaffirmed the pledge (made in the Conservatives’ election manifesto) to maintain higher-than-inflation rises to the state pension, the commitment only stands until 2020.

The mechanism, known as the ‘triple lock’, increases the basic state pension each April by the higher of the growth in average earnings, the Consumer Price Index (CPI), or 2.5%. Opponents claim that it is ruinously expensive at a time of scarce public money.

Furthermore, Baroness Altmann, former Pensions Minister, believes that the policy has outlived its purpose. “The triple lock is a political construct, a totemic policy that is easy for politicians to trumpet, but from a pure policy perspective keeping it forever doesn’t make sense,” said Altmann.

With above-inflation increases to the basic state pension being challenged, a DB cliff-edge, and monetary policy that is keeping both interest rates and gilt yields artificially low, there are significantly more hurdles for Britain’s future retirees than for the current crop.

“Those approaching retirement could be setting false expectations if they want a similar level of comfort in later life to that of their parents or recently retired friends,” says Aegon pensions director Steven Cameron. “The question is whether we have reached a tipping point, with gold-plated DB pension schemes largely been phased out, and the future of generous state pension increases also called into question.”

Locked out

The fact that today’s pensioners are wealthier than ever before also throws into question whether it is at the expense of the generations coming up behind. Young adults, in particular, have suffered years of stagnating wage growth, rising unemployment and low rates of home ownership, whilst at the same time paying for pension spending promises through taxation.

The new Prime Minister has talked of “social justice” and “a Britain that works for everyone”, and the new Pensions Secretary, Damian Green, has said that there is a need for “intergenerational fairness”, yet the new-look cabinet has so far failed to reveal any new policies that would directly benefit younger generations. 

Automatic enrolment has been a success in getting millions starting to save more towards retirement through a workplace pension, but in truth, most people still aren’t saving nearly enough to give them the standard of living they hope for.

Individuals in that position have four choices: increase their pension contributions; take more investment risk; push back their planned retirement date; or, finally, reset their expectations of wealth in retirement. The impact of delaying those decisions could be huge, but taking swift action could ensure your living standards are maintained at the levels enjoyed by many pensioners today.

 

1 The Golden Age of Retirement – does rising pensioner wealth mask future problems? Aegon 2016

2 ONS Pensioners’ Income Series 2013/14

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