By Mubin Haq, CEO, abrdn Financial Fairness Trust
Generational divides risk continuing into retirement
You might think we’ve solved most of the problems relating to retirement. Aren’t those baby-boomers draining the public purse with their triple-locked and gold-plated pensions?
Well, you’d be right to think that living standards in retirement have improved. Pensioner poverty was as high as 40% in the late 1980s, but has fallen to around 15%. A dramatic fall and a huge success story. However, this trend is unlikely to continue, in fact it’s looking particularly bleak for younger generations; that proverbial avocado on toast isn’t going to continue into old age for many.
For a start, there has been a huge decline in final salary/career average pensions. Whilst these remain popular in the public sector, in the private sector they’ve nose-dived as they are often a higher cost and a greater risk for employers. This type of pension covered around 40% of private sector employees 25 years ago but now they make up just 12%. Well not to worry, you might say, hasn’t auto-enrolment filled the gap?
It’s true that auto-enrolment has been a great success. All employers must provide a workplace pension (a defined contribution scheme) to those earning above £10,000 and over 22 but under the state pension age. Since being introduced a decade ago the proportion saving into a pension in the private sector has doubled, rising from 40% to 80%.
However, the rates people are saving are just too low, with minimum contributions of 5% of earnings from employees and just 3% from employers. Just 1 in 5 on these defined contribution schemes are set to have a decent standard of living in retirement. And for low-paid workers, just 1 in 20. We urgently need to raise the contributions from employers; a new Living Pensions scheme is aiming to do just that.
We’ve also seen big changes to the labour market, with millions more in self-employment and in insecure work. But there have been no auto-enrolment style incentives to help the self-employed save. Twenty-five years ago, nearly half (47%) of the self-employed were saving into a pension. That’s dropped to just 1 in 6 (17%). Those in insecure work are often juggling jobs with several employers and many are not covered due to auto-enrolment’s £10,000 earnings threshold.
The pensions problem is exacerbated by steep falls in home ownership. Millennials with a degree by their mid-30s have home ownership rates of 60% outside of London. For baby-boomers the rate was nearly 80% at the same age. For those without a degree, home ownership for millennials is 40% and for baby-boomers it was around 75% at the same age. In London the rates and differences are even more stark.
This matters because homeowners have often paid off their mortgage by the time they retire. Many in the private rented sector are likely to remain there and will face higher costs than homeowners. While quite a few millennials and Gen-Zs will get some inheritance as they retire, the big windfalls will go to those who least need it and are already homeowners. With higher costs from renting, future generations will need larger pensions and more will be reliant on the state to pay, via Housing Benefit. Though this won’t cover all of the costs for many.
We’ve got some big demographic challenges ahead too. An ageing population means fewer workers to pay for state pensions. By 2070, pension benefits are projected to increase by an extra £100bn and health and social care spending by an extra £180bn a year in today’s money. That means just over a quarter of national spending going on pension benefits and health and social care.
We have other demographic challenges too, with more of us living alone. Costs can be shared between couples, which is why single pensioners have higher poverty rates than couples, nearly double. And the same inequalities we see elsewhere, relating to gender, ethnicity and disability also occur in retirement. Lower savings for women, disabled people and most minority ethnic groups, much of this relating to their increased likelihood of earning less.
Those are just a few of the big issues we need long-term thinking on now. Twenty years ago the Pensions Commission was able to achieve significant change such as changes to the state pension and the introduction of auto-enrolment. However, since those reforms, much of the landscape has changed as outlined above. Which is why we at the Financial Fairness Trust are launching a new Pensions Review with the Institute of Fiscal Studies.
The Review will be chaired by the former Chancellor, Alistair Darling, who will work alongside the former Work and Pensions Secretary, David Gauke and Joanne Segars (former CEO of the Pensions and Lifetime Savings Association). It will look at the big questions we need to be answering to make sure we don’t see a rise in pensioner poverty or continue intergenerational unfairness into retirement. Otherwise, we might hear some voices advocating for a Logan’s Run approach to deal with the burgeoning costs relating to retirement.