The demise of defined benefit pension schemes means millennials and Generation X will never be able to match the pension provisions of the baby boomer generation, an Institute and Faculty of Actuaries report has revealed.
The institute's report stated on many measures the younger generations – the millennials (born 1981 to 2000) and generation X (born 1966 to 1980) – are not doing as well as the big generation of baby boomers (born 1946 to 1965) which came before them.
Writing in the institute's report, Lord David Willetts, chairman of the Resolution Foundation’s Intergenerational Commission said: "It is not in and of itself shocking that those in their 50s and 60s have much greater pension claims and assets than those in their 20s and 30s.
"But it is shocking if they have assets on a scale which their children are never going to be able to match. The fact that nearly all the growth in pension wealth since the financial crisis has been enjoyed by the over-55s suggests this is a very real risk.
"Above all, however, the generational pensions divide has been driven by the trajectory of defined benefit pensions. For 30 years successive governments of all parties legislated to change the pensions promise to make it more generous than most companies intended when they set up their pension schemes.
"There were improvements to the rights of early leavers and widows and widowers. Inflation protection was enhanced too. This increased the value of the company pension promise for many baby boomers.
The generational pensions divide has been driven by the trajectory of defined benefit pensions.David Willetts"But as a result companies resolved never to be caught out by such an expensive promise again, by and large closing defined benefit schemes to new members. This very generous pension entitlement has become a once-off special offer for one generation only.
However, former pensions minister Sir Steve Webb in the same publication pointed out that claims of pensioners living in the lap of luxury were highly misleading.
He said: "The average occupational pension income for a man is one third higher than for a woman.
"Among married couples the difference between men and women is likely to be much greater as many more married women will have had breaks in their career because of caring responsibilities, which will have reduced any workplace pension they might receive.
"Whilst it is true that the newly retired have quite a high level of income from occupational pensions, there is some evidence to suggest that this is now nearing a peak.
"If public policy were to reduce support for pensioners now on the basis of high levels of occupational pension coverage among today’s newly-retired, such policy might need to be reversed in relatively short order as more poorly-pensioned workers start to reach pension age."
But there is one glimmer of light, Sir Steve believes housing wealth will benefit future generations with a significant amount of wealth that will sooner or later ‘cascade’ down to younger generations.
Andrew Hood, senior research economist at the Institute for Fiscal Studies, said what politicians need to tackle is in their early 30s, less than 10 per cent of private sector employees born in the early 1980s are members of a defined benefit scheme compared with nearly 40 per cent of those born in the 1960s.
But nearly 70 per cent of employees born in the early 1980s are now (in their early 30s) members of a workplace pension scheme (defined benefit or defined contribution), compared with less than 55 per cent of employees born in the 1970s at the same age, he added.
He added in the long term, the single tier state pension introduced in April 2016 will be less generous to just about everyone (except the self-employed) than the system it is replacing.
Colin Wilson, president of the Institute and Faculty of Actuaries, said: “We believe intergenerational fairness is at the very core of the debate around pensions. The ultimate goal is to create a framework that provides a financially sustainable life in retirement for all. But the answer is not straightforward.
“In order to ensure that everyone benefits from the system, there is a clear need to review current policies like the pensions triple-lock, the state pension age and the transition from defined benefit to defined contribution schemes, through the lens of intergenerational fairness.”
Commenting on the plight of the millennials, Darren Cooke, director of intermediary firm Red Circle Planning, said: "The younger generations have a tougher time of it: fewer active defined benefit schemes open and a less generous state second pension as well as a higher pension age for both private and state provision."
Malcolm McLean, senior consultant at Barnett Waddingham, said: "There is no doubt that overall pension policy has tended to favour the old at the expense of the young in recent years.
"This not to say that all pensioner benefits should be cut to the bone but more attention should be given to the needs of the young in both social and housing policy than has happened previously."
Ben Simpson, head of wealth management at Menzies LLP, said recent reductions in the lifetime allowance and annual allowance will materially impact the ability of the younger generation to fund their pensions sufficiently to match the benefits enjoyed by some of the older generation.
He said: "That is of course assuming that the younger generation actually had sufficient surplus income to make large pension contributions.”
stephanie.hawthorne@ft.com
