Equality and pensions - getting the balance right
For adviser use only
The significant differences between the earnings of top male and female BBC stars put the gender pay gap firmly on the front pages of the national press recently. This meant that the other big news that day, the Government’s decision to increasing the State Pension age to 68 seven years earlier than planned, didn’t make as many headlines. The former was about gender and pay and the latter about generations and pensions, but both highlighted the issue of equality and fairness.
I fully expect equality and fairness on pay and pensions, between the genders or generations, to be at the heart of future Government policies, and quite rightly so. Advisers are well positioned to help people understand what changes already announced and likely future trends will mean for their clients’ financial futures.
An ageing population
Let’s not forget the underlying good news story here - on average we’re living longer. The sting in the tail is that someone has to pay for that. With an ageing population, the Government will be very conscious of the growing cost of state pensions, but cost-saving plans to remove the triple lock are now on the back burner. The ‘pay as you go’ nature of the UK’s state pension means it’s National Insurance contributions from today’s workers who pay today’s state pensioners. So unless State Pension age is pegged to increases in life expectancy, pay-out periods will get longer and longer, placing an ever greater burden on those of working age.
For those clients who don’t relish working into their 70s, the key advice message has to be to revisit the adequacy of private and workplace pensions to bridge the increasing gap before state pension kicks in.
Creating intergenerational unfairness
The recent publicity around the Universities Superannuation Scheme’s record £17.5 billion defined benefit scheme deficit also highlighted generational issues. One suggestion was student tuition fees might be increased to fund the deficit. Defined benefit schemes have always involved cross-subsidies between generations, with a year’s extra accrual costing much more at 55 than at 25. But surely solving historic defined benefit deficits by saddling our future workforce with even greater student debt is a step too far – a case of robbing grandson Peter to support grandpa Paul’s pension.
Advisers will be only too aware of the huge challenge we face in encouraging younger generations joining the workforce to take pensions seriously. Substantial student debt with high-interest repayment rates and an increasingly daunting task of getting on the property ladder are just some of the challenges older generations didn’t have to face. So we need to get the message over that despite the temptations, opting out of an employer’s pension scheme is not the right answer. Giving up employer contributions is turning down free money, and contributions paid in the early years have most to gain from investment growth, so opting out is doubly damaging for younger generations.
Social care funding
Intergenerational fairness will be a key factor in the promised Government consultation on social care funding. As we live longer, more of us will need some form of social care in later life, but who should pay? I believe we need a clear, sustainable ‘deal’ between the state and individuals, which is, and is accepted as, fair between wealth bands and generations. I also believe an overall cap on personal contributions is essential. This could open up a major new area for advisers to help clients plan ahead to meet potential care costs while protecting inheritances.
There are those who advocate planning for social care costs through some form of protection policy or through a new form of standalone ‘care ISA’. But to me, we already have a solution, at least for those with defined contribution pensions. The pension freedoms give people the ability to choose how and when to draw income. They also allow people to notionally ring-fence a part of their pension to be used should they need social care, without facing penal tax on remaining funds on death. Adding social care considerations into at retirement planning can only increase the need for advice.
Advice across the generations
Every generation faces its own challenges, financial and otherwise, and these have changed dramatically. Figures show those who have retired in recent years have almost caught up with the incomes after housing costs of those of working age, largely because of generous defined benefit schemes and more affordable property purchases. But younger generations in defined contribution schemes need to be helped to understand that they are less likely to enjoy the same retirements as today’s ‘golden age’ of retirees.
Agreeing on the best approach to fairness won’t be simple, but it needn’t lead to conflicts between the generations. Most younger people want to see older generations have a dignified retirement and parents and grandparents want to see future generations have the best start in life they can, without being crippled by financial burdens. The State will always play a core role, but whatever your gender or age, it’s increasingly clear there’s a need to make personal provision for the future. The need for financial advice can only increase.