The UK’s intergenerational contract is under more strain than ever, and radical reforms are needed to secure the funding of increasing care costs while helping young people to save, according to Conservative peer Lord Willetts.
An overhaul of the UK pensions system was recommended on Tuesday by the Intergenerational Commission, a diverse group of thought leaders brought together by Willetts’ Resolution Foundation, in a paper that also made controversial calls for an “NHS levy” – paid by those over state pension age – and a £10,000 “citizen’s inheritance” for young adults.
The ambitious proposals target a widening gap between the millennial generation and their baby boomer parents. Disposable incomes for young adults are no higher than those experienced by the preceding generation, breaking a trend of continuous improvement.
There does need to be some sort of change that gives the young generations a helping hand
Jon Parker, Redington
Millennials are pessimistic about their chances of improving on their parents’ lives, while the burden for future increases in social care spending on baby boomers is currently set to fall mainly on the younger generations of working age, the report found.
“We have shown that generational progress has indeed stalled. Moreover, we face significant challenges in providing the health and care that older generations expect,” wrote Willetts in the foreword to the report.
“If the evidence is so powerful then that means there is an obligation to act,” he continued.
Pensioner costs will increase
This intergenerational rebalancing will require increased taxation of the elderly and wealthy cohorts in society and increased spending on both care and young people, according to the commission’s proposals.
Some of those proposals, in particular giving all those who entered the labour market during or after the financial crisis a £10,000 restricted-use endowment, have attracted criticism as blunt instruments. The grant, for example, may only inflate property prices.
Nonetheless, the case for combating intergenerational unfairness remains strong, said Jon Parker, director of defined contribution and financial wellbeing consulting at Redington.
“There does need to be some sort of change that gives the young generations a helping hand,” he said.
Pensions gets a makeover
The commission’s recommendations for the UK’s pensions policy, while equally ambitious and wide-ranging, may prove less controversial.
Giants of the so-called gig economy and others contracting self-employed labour would be required to make pension contributions, while the auto-enrolment earnings threshold would be lowered.
Employee contributions would be exempted from national insurance, and the paper called for the gap between employee and employer pension contributions under auto-enrolment to be narrowed.
A flat rate of tax relief on pension contributions should be introduced at 28 per cent, pension freedoms should include a default purchase of guaranteed income at age 80, and the government should expedite the facilitation of collective DC schemes, the report recommended.
Easy wins for government
Many of the suggestions proved popular with pensions industry experts.
Natanje Holt, business development manager at technology provider Bravura Solutions, said she “really liked” the idea of defaulting to annuity purchase at age 80.
“As we’re living longer, people will actually need an income from that age onwards,” she said.
Concerns over the cost of deferred annuities could be allayed by simply earmarking “a part of your pension pot that would continue to grow”, to buy an annuity at a better price. Similarly, Holt called the lowering of the earnings threshold a “no-brainer”.
Flat rate tax relief could hit snag
The idea that tax relief on pension contributions should be offered at a flat rate has gained considerable momentum in recent months, with the Royal Society of Arts issuing a similar call in April.
Parker said: “The case for doing something with tax relief is very strong. It doesn’t seem fair that the vast majority of the benefits of tax relief go to those with the highest earnings.”
However, there are still kinks to be ironed out. “Most tax relief is actually on employer defined benefit, so what does 28 per cent relief mean for a DB scheme?” asked Steve Webb, director of policy at provider Royal London, arguing that neither member nor struggling employer would welcome an unexpected tax bill.
On the CDC proposals, Webb admitted that the model is unlikely to be taken up by employers who have already shifted to DC, but argued that it may still prove useful for large sponsors looking for a sustainable alternative to DB.
