There is a fairly widespread assumption the baby boomer generation now retiring or approaching retirement have a gilded future in front of them. The inference is they are all sitting on large pension assets.
However, there is mounting evidence this is not the case, and retirement incomes will increasingly vary wildly for this generational cohort. Retirement incomes will change in the face of the rapid and accelerating decline of defined benefit (DB) pensions in the private sector, and the equally rapid ascent of defined contribution (DC), among other factors.
Large numbers of private sector employees, until the advent of automatic enrolment, were not putting anything into a pension arrangement of any sort. Retirement saving adequacy has got a long way to go under auto-enrolment before it starts to turn a corner, or at least for the 90% or so of employees who have not, so far, opted out of saving.
Quite stark differences in outcomes can already be observed, not always defined by social class. Inadequate savings levels could soon become a middle-class nightmare.
Underpinning retirement income of course, is the flat-rate basic state pension for those with an adequate national insurance record. For those earning modest amounts, it probably represents an adequate replacement rate of income at retirement, but for anyone on the national average wage of around £27,000, dropping income to just over £8,300 looks a steep fall. For those used to earning more than that, it is approaching disastrous. Yet the average DC pot remains stuck around the £27,000 mark as it has done for years. Those boomers who had the support of a good DB pension are passing through now, but the cohort behind them is frequently facing DC pension saving, even after a lifetime of white collar work.
Pension outcomes are starting to vary widely, even among next-door neighbours, seemingly randomly and based on whether or not your employer offered a pension scheme and how generous their contributions were.
Those born after, say, 1955, face in many cases poorer pension outcomes than those born after 1945, and for those born after 1960, the outlook in many cases will be poorer still. Some commentators suggest it will take another 20 years of declining retirement saving outcomes before we turn the corner under the impact of automatic enrolment. This is frightening stuff.
The exception to this is those working in the public sector. Here the contrast could not be starker, with DB pensions still widely on offer and long employment histories quite commonplace, building up high pension entitlements in many cases.
Most public sector pensions are unfunded, leaving the taxpayer to pick up the bill. The public sector pensions reforms recommended by John Hutton a few years ago and implemented be the coalition government attempted some low-level changes, but it was a compromise, under resistance from unions to perceived pension cuts. Perhaps it was wishful thinking to expect metaphorical turkeys to vote for Christmas, but with amortised liabilities for these pensions at, or above, the national debt, something, sometime, will have to give.
Private sector workers are paying for their pensions at least twice; they are saving for their own pensions from income, and for the public sector’s pension through their taxes. In an increasingly unequal set of outcomes in the private sector, how long will it be before we see street protests demanding that public sector workers get the same DC pensions now so prevalent in the rest of the workforce?
Malcolm Small is founder of the Retirement Income Alliance.