Pensions are boring. I say this from a position of some knowledge. I spend quite a lot of my working life talking about pension policy. I find the subject almost endlessly fascinating, but I am aware that most normal, healthy, well-adjusted people do not. For friends and colleagues, my fascination is regarded as something between an idiosyncrasy and a pathology
Being bored by pensions is rational. Pensions are often complicated and hard to engage with. I have lost count of the number of times people have told me they have a pile of envelopes from multiple pension providers sitting unopened in a drawer at home. We know we should open them and do something about the contents, but who has the time or enthusiasm?
This is basic human psychology in action. We are hardwired to focus on the present more than the future. Our brains simply do not engage well with things that seem a long way off.
This indifference has shaped pensions policy for years. One of the central features of UK pension policy over the last decade and a half has been auto-enrolment, whereby people are automatically placed into a workplace pension when they start a job, unless they actively choose to opt out. In essence, pension policy has made a virtue of boredom and inertia, using people’s lack of engagement to get them to save anyway.
For many in Generation X, retirement will mean tightening belts and lowering expectations
That same indifference has also helped keep politics out of pensions. Pension policy is rarely the subject of major party-political conflict. Most politicians realise that there are not many votes in taking an eye-catching position on pensions, and so the subject is generally handled in a sensible and technocratic fashion. (It’s also matters that many politicians, advisers and officials are both too young to care much yet about pensions, and also too well-insulated by public sector DB pensions.)
But that indifference may just start to fade. Pensions may yet become politically interesting and perhaps even politically exciting.
This is because of people like me. No, not because of pensions nerds. With the best will in the world, I do not think we have the power to change the way a whole society thinks about retirement. No, by people like me, I mean members of what the marketeers call ‘Generation X’: people born between roughly 1965 and 1980.
Generational analysis is all the rage, even though the differences between generations are often exaggerated by people trying to sell things. But when it comes to pensions, there really are substantial generational differences, and some of the biggest and most painful concern Generation X.
The big story of pension provision in the UK over the last fifty years has been the decline of defined benefit pensions – the old ‘final salary’ schemes that promised a guaranteed retirement income – and their replacement by defined contribution pensions. These are essentially investment pots from which individuals are expected to fund their own retirement.
People older than Generation X, if they had workplace pensions at all, were much more likely to have defined benefit pensions providing a secure and predictable income in retirement. Younger generations are far less likely to enjoy that kind of security outside the public sector, but they do at least have something potentially valuable on their side: time.
Millennials and Generation Z entered the workforce after the introduction of auto-enrolled workplace pensions in 2012. That means most or all of their careers will be spent building pension savings, giving their investments decades to grow and compound. They are not guaranteed comfortable retirements, but they at least have a fighting chance of building meaningful pension wealth.
Generation X sits awkwardly between these two worlds. For many of us, auto-enrolment arrived when our careers were already well underway, meaning that for years we either did not save into pensions at all or saved very little. And when we did start saving, often through auto-enrolment, the amounts going into our pensions were frequently too small and started too late to benefit fully from decades of compound growth. As a consequence, some of us will end up in later life – to use a technical term – screwed.
That is not merely my analysis. It is also the conclusion of the Pensions Commission, the independent body established to examine the future of retirement provision in the UK. Its interim report, published last week, makes grim reading for Generation X.
There are various ways of measuring the quality of retirement people can expect. One important measure is the ‘target replacement rate’: the proportion of your working-age income you will need in retirement to maintain a similar standard of living. According to the commission’s analysis, more than half of Generation X are currently on course to miss their target replacement rate. In practical terms, that means a significant fall in living standards after retirement. Retirement will not represent greater comfort and security. For many people, it will mean tightening belts and lowering expectations.
For a smaller but still substantial proportion of Generation X, things look worse still. Depending on factors such as state pension uprating, the commission estimates that up to 20 per cent of Generation X could fail to meet the minimum retirement living standard.
That does not automatically mean poverty. It does, however, mean lacking enough income to afford what most people would regard as the basics of a dignified and reasonably comfortable later life. It means budgeting carefully for food. Limited social activities. Holidays becoming difficult or impossible. A retirement defined by financial anxiety rather than security. This is not a happy prospect. It is also one that I think is becoming more visible and more widely recognised.
Perhaps because of my age – I’m 50 – and therefore the age of many of my friends and peers, I find that conversations about pensions outside my professional life are beginning to change. Whereas people once backed away slightly horrified when the p-word was mentioned, more people are now starting to engage. They are beginning to realise that what awaits them in later life may not be the comfortable ‘golden years’ once imagined but something tougher.
Technology will play a role here too. One day, the pensions industry may finally achieve its long-promised holy grail: the pensions dashboard, an app or site allowing people to see all of their pension savings on a single screen. Suddenly, all those unopened envelopes will become visible in one place, together with a clearer picture of what their contents means for later life.
Generation X waking up to their grim retirement prospects may just drag pensions into the political arena. People will start to realise that they are not currently on course for the retirement they expected. The politics of intergenerational comparison will sharpen this further. Human beings dislike feeling unfairly treated. If Generation Xers come to believe that they have suffered a uniquely bad settlement – while their parents enjoyed more security and younger generations at least have the possibility of decades of compound growth ahead of them – they may become rather shirty.
Quite how this new politics of pensions develops is hard to predict. There will, of course, be huge differences within generations. Some members of Generation X will ultimately be fine, not because of generous pensions but because they inherit housing wealth or other assets from family. Others will not.
It seems, however, that a reasonable guess is that the prospect of hardship in retirement will do two things. First, it will encourage Generation X finally to open the stack of pension envelopes accumulating at home. Second, it will encourage politicians to pay attention to the grievances contained within those envelopes. For that reason, the Pensions Commission’s interim report deserves to be read well beyond the relatively small world of pensions policy specialists. Politicians more widely should pay attention too.
What happens next? The commission will publish its full report sometime next year, setting out recommendations for how policy might improve retirement outcomes. I would not be at all surprised if it recommends some form of targeted support for Generation X savers.
The timing matters. The final report is likely to appear just as Westminster begins gearing up for another general election campaign. Under those circumstances, the chances of pensions remaining beneath the political radar look rather low.
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