As Michael Johnson recently outlined in his letter to the Select Committee on Intergenerational Fairness and Provision, Generation Y (aka millennials) could be the first generation to experience a lesser quality of life than their baby boomer parents.
This statement raises a great number of questions, including many around adequate pension provision for a whole generation.
Intergenerational fairness is clearly an important issue, which has also recently been highlighted by the House of Lords in their Select Committee report and the Financial Conduct Authority in their discussion paper.
We’re thinking about it too as part of our forthcoming regulatory strategy, so in the first of a series of informal meetings on topical subjects, we invited a mix of pensions and non-pensions experts to a roundtable discussion to talk about the issue.
The group discussed whether the view that millennials will be worse off than their parents is tangible, and the risks and recommendations for the pensions industry and government in addressing it.
What’s the problem?
It was agreed that there are known issues affecting millennials more than their parents, some of which have erupted as a result of the financial crisis – such as housing prices, increased student debt and concerns around adequacy of pension provision. Traditional career structures aren’t as prominent and employment opportunities are not as ‘neatly packaged’ as they were in the past. The rise of the gig economy and more flexible working is enabling longer working lives and also means people are not tied to a career in the same way as they might have been in the past. It’s also understood that there is a continued lack of appreciation around pensions, particularly with younger savers.
Pensions for a new generation
Some members of the group discussed whether TPR should actually do less around defined benefit (DB) funding risks, given there is good protection from the Pension Protection Fund for these schemes. This would be a fundamental shift away from our statutory objectives. And should we be less concerned about some employers tipping into insolvency when it is in the interest of the pension scheme, the business is not sustainable, and could in fact be suppressing UK employment productivity, which is a driving factor in intergenerational fairness?
In terms of pensions, the group agreed that automatic enrolment has been hugely successful in getting people saving for the first time or saving more. But they also asked if we should be doing more influencing on adequacy, freedoms and tax policies to ensure their combined effect is fair on different generations and creates the right incentives. The discussion turned to whether current contributions will provide enough to meet savers’ expectations.
We kept coming back to the theme of people’s expectations versus their actual pension outcomes. This was particularly interesting in terms of the differences between DB and DC pensions, and is particularly poignant when thinking about millennials, who – some argue – have unrealistic expectations that they are basing on their parents’ experiences of pensions.
The group discussed whether creating additional earnings bands could help people automatically put more into their pension as they earn more. Many in the group also agreed that Collective DC (CDC) could be an answer to addressing many of these issues but that it would need scale, potentially in the form of multi-employer CDC master trusts.
A widespread lack of appreciation of the benefits of having a pension should be a concern for our industry. It is a concern for us as a regulator because making sure pensions are well-run is only part of the equation for those looking to secure an adequate retirement.
The group generally agreed that better member engagement leads to better outcomes, so we all need to work to make pensions information easy to understand and easy to find. People need to know how much they’re saving, how much they can look forward to when they retire and what their options will be.
Although we are in many ways restricted as a regulator in terms of creating change (as we work to legislation), it is important that we continue discussions across the industry and within wider government, to ensure all parties are aware of and understand the key risks associated with such social dilemmas.
As we develop our regulatory strategy we will, I’m sure, come back to some of these issues. We can then work to take steps to make improvements and influence where possible, hopefully driving towards a system that works for generations to come.
By David Fairs
Executive Director of Regulatory Policy, Analysis and Advice