How to address intergenerational unfairness in pensions

This generation has benefitted from sustained rises in house prices giving them property wealth not seen before.

In terms of pensions, the triple-lock introduced in 2012 promises pension increases to state pensions at the greater of inflation, average earnings growth and 2.5 per cent. While this was introduced to correct a relative falling in the value of the state pension, it has resulted in generous increases, putting a greater strain on public finances.

Employers should review their overall pension budget and ensure larger DC contributions are paid

Meanwhile, the promise of providing DB pensions has been far more expensive than many envisaged, and this has been exacerbated over recent years with falling bond yields, meaning the liabilities associated with the cost of paying the benefits promised goes up.

This has resulted in an increasing drain on company balance sheets and government costs for their funded and unfunded schemes. This cost has to be met via taxation (including on younger people) and/or reduced investment in business growth, with funds diverted to pension costs.

The longer-term impact is that many young people will also be in defined contribution schemes, with contributions from the employer at much lower levels and with more uncertainty and lower levels of eventual retirement provision.

So what are the solutions?

Resolving this is complicated by the fact that unfairness is built into the system; short of radical (and unfair) alteration, we can only change things for the future.

When it comes to the state pension, the consensus among most is that the triple lock has done its job to bring the state pension to a more reasonable level, and that the triple lock should be removed and replaced with a simple link to average earnings. This would maintain its link to working people’s income and reduce further strain on government expenditure.

The problem with DB pension schemes is that promises are made and should be honoured. Calls to allow schemes to renege on promises made in the past would be unfair on members. Many with DB hold a valuable benefit, but punishing them would be unfair – particularly if there is no guarantee that savings would be passed on to younger generations and not just end up in shareholders’ pockets.

As for DC pensions, the government could ensure more money is paid into DC schemes by members and employers by reviewing minimum levels of contribution and looking to increase these over time.

In addition, if an employer’s goal for their pension scheme is to put people into a position where they can retire and move on, then paying more meaningful sums into their DC scheme will be the only way of achieving this. This should be accompanied by government education initiatives around the benefits of saving effectively for retirement.

What can employers and trustees do?

Many of these issues are of a macro nature, and the debate is often beset by emotion, with an adversarial bent. However, different generations should not blame each other; it is important to recognise that many are victims or beneficiaries of the system and a changing world.

Employers are at the forefront of these issues and can help change how future generations experience pensions. They should review their overall pensions budget and ensure larger DC contributions are paid into employees’ pension funds.

DB scheme trustees can also ensure they assist employers by working with them to help fund the existing pension promises and by having consideration for the sustainable needs of the employer.

David Brooks is technical director at consultancy Broadstone