Pensions unfair to younger generation, industry says

The debate centred on the motion 'This house believes the present pensions system is unfair to the younger generation and that this is damaging to our society' and was supported by 58 per cent of those in attendance, narrowing from indicative numbers of 69 per cent taken at the outset.

Lord David Willetts, executive chair of think-tank the Resolution Foundation, said previous generations made promises to themselves in the form of defined benefit pension arrangements, which are now unsustainable.

Younger workers are working to generate resources so the company can plug a deficit in a pension scheme of which they are not, and never will be members

David Willetts, Resolution Foundation

He said DB pension arrangements changed from the original intention, “which was almost a with-profits promise”.

“It didn’t have any inflation protection, didn’t have any rights for widows or widowers, didn’t have many rights if you left the company and moved on during your career. It wasn’t a particularly generous promise but it was affordable and many companies offered it.”

He added: “What we then voted for under successive governments… we then voted for policies that improved that pension promise so that it became far more generous than the companies ever intended when they first made that promise.”

“It is now a cast-iron property right to an inflation-protected pension with rights for a widow [or widower] and many other special features… we converted what should have been an ongoing scheme that went from generation to generation into a one-off special offer, a one-off promise so generous that no other generation could ever have the opportunity of enjoying such a benefit again.”

As pension entitlements form a “significant” part of returns to labour, Willetts said even in companies that offered a fair share of revenues as compensation, this is often taking the form of pension contributions and recovery plan payments.

He said: “Younger workers are working to generate resources so the company can plug a deficit in a pension scheme of which they are not, and never will be, members.”

Contribution levels

Helen Prior, senior client manager at fiduciary manager Cardano, said levels of contribution for defined contribution schemes were also well below those in DB.

She said: “In the 2014 Office for National Statistics survey, the average combined employer and employee contributions for a DB scheme were 20.9 per cent per annum, and that fell to just 4.7 per cent for a DC scheme.”

Contribution levels are expected to rise dramatically as auto-enrolment minimum contributions increase over time, but Prior said even the 8 per cent combined figure would still fall short of the 11 per cent to 14 per cent contribution the Pensions Policy Institute estimated would be needed for an adequate retirement income.

However, Paul Spencer CBE, chairman of the BT Pension Scheme, opposed the debate's motion, claiming that increased flexibility is a key advantage of the shift to DC schemes.

He said: “These dinosaur funds, these DB funds are very tightly controlled by the trustees and by legislation… The truth of the matter is, they are no longer fit for purpose, and that’s why they are closing.”

He also said the virtues of DB were often overblown; the average [pension] for retired members of the BT Pension Scheme was around £8,000.

“Most pensioners in DB schemes are not even getting a state pension… The old system did not work for the great majority of people, they were led to believe ‘we will have a good pension, we can live on it'. They haven’t been able to.”

Lack of education

Jane Higgins, partner at law firm Allen & Overy, said the problems lie in the low levels of financial education rather than the pensions system.

“The current pensions system is different from the previous one, but for good reasons," she said. "The younger generation is also different from the previous one, and we need a pensions system that fits.”