Adrian Boulding: pension funds need concrete foundations

After paying in to his pension for 35 years, he was so distressed by the austerity measures that have cut old-age benefits by an average of 25%, that he ended his life.

Without wishing to intrude further into the personal grief of those that loved him, we should take stock of the wider issues this tragedy brings to the fore.

It is a stark fact of life for older people that their very survival is dependent upon the younger, working generation. Virtually everything the pensioner needs, from food to fuel to medical care has to be provided by those still young enough to work.

This transfer of wealth is underpinned by the principle of intergenerational solidarity, and in theory each working generation will care for their elders in the hope and expectation that in due course they too will be provided for in their old age.

The principle is very clear in the case of unfunded state pensions, where the taxes of current workers are diverted to pay the pensions of those already retired.

And they are clearly very vulnerable to political intervention, with the government of the day doing whatever they consider necessary, either to retirement dates or benefit levels, to balance the nation’s books.

Funded pensions appear to circumvent this. The ownership of hard assets certainly gives the pensioner a stronger hand in the negotiation of wealth transfers between generations – but the elasticity of that illusion can only be stretched so far.

Future governments can ‘adjust’ the value of those assets quite easily in myriad ways. A mansion tax on large properties, higher taxes on pension pots above a certain threshold, or the removal of income tax allowances for pensioners are just some of the ideas proprosed to nibble away at the grain store pensioners may have set aside for their retirement.

Intergenerational transfers are in danger of breaking down when one generation perceives that the bargain has become unfair and the burdens asked to pay for have become too great.

David Willetts has already cautioned that the baby-boomers may be spending their kids’ inheritance.

One thing we can do to redress the balance is invest pension assets wisely. Where pension savings are used to support long-term infrastructure projects such as railways and airports, we can reasonably impute that those assets will be generating additional wealth during our retirement – and hopefully some of that wealth will transfer to us.

In contrast, investments that support immediate consumption may leave us holding little more than an IOU which, as Greek bondholders have found out, may not be all it promised to be.

Adrian Boulding is Pensions Strategy Director at Legal & General