Intergenerational fairness

I learnt a new word a few days ago – ‘millennial’ – and now I realise that in the same way I fit into the world as a “baby boomer” defined roughly by when I was born, millennials were born in the last years of the twentieth century and the early years of the noughties (so to all intents and purpose either 20-somethings or not too far removed from that age group).

The FT recently produced a report on millennials entitled “Millennials and their money” with the subtitle “20-somethings feel financially doomed so do not save”.

The report looked at the financial mismatch between what these millennials want and what they can actually afford with high property prices, lower wages and a lack of career certainty. It suggests that they “prioritise short-term spending over long-term saving” and are “entitled and loaded with unrealistic expectations”. They are a technological generation who are real DIYers.

Interestingly this seems to be a subject that is of wider interest, as a couple of days later I came across a piece in an American financial magazine; “Review how the working world has changed for millennials” and was actually written by a millennial. The focus was on three assumptions of the working world that can no longer be relied upon as normal by millennials, and those three assumptions were quite close to the report conclusions I’d read a few days prior.

The three US assumptions are:

  • It is easy to get started
  • You can expect job security
  • You’ll have a pension waiting at the end

As I mentioned earlier, I think I would come under the definition of a ‘baby boomer’, which gives me a few more years than those in the study and, guess what, I can remember leaving school/university (albeit a few years ago) and the concern over what I was going to do. Inflation was high, interest rates were high and there was high unemployment and to top it off, I had never even heard of a pension.

The question of house ownership never arose and I am not sure that I would have admitted to a researcher that I did not save because I felt “financially doomed” but more that I had better things to do with my money. Of course, I prioritised short-term spending over long-term saving - wasn’t that what everyone did? I am sure that the ‘long-term’ wasn’t even invented until a good few years afterwards!

Under all the gloss there is, however, a serious point that is increasingly being considered and that is ‘intergenerational fairness’.

The generation between the baby boomer and the millennial has been referred to as ‘Generation X’ and much has been written about the fact that they will be the first generation who will be poorer than their parents. The fear is that particular generations have taken the most out (baby boomers take out 118% of what they contributed) and that there will be less chance for future generations to do the same.

Indeed, the current Government has just finished an inquiry on intergenerational fairness as an examination into whether their policies are likely to contribute to it (closed 19 February 2016).

The pension and retirement aspect of all this is integral to the whole subject.

The demise of DB and the rise of DC pension schemes have played their part, with guaranteed income in retirement superseded by DC and the reliance on investment markets.

There is now increased competition for pension contributions due to lower wages, higher housing costs and education costs, not to mention guaranteed pensions shifting investment risk to individual scheme members.

We have increased longevity and the fact that the number of people over retirement age is increasing while the number of people paying tax to support them is decreasing. This also means that money that might have been expected as an inheritance is being spent in a longer retirement.

It also means that the tools a Government has to use to fund pensions are fewer and perhaps we will see the move more to increasing the state pension age. The ‘triple lock’ on state pension being higher than the increase to other benefits has also been questioned.

If we are serious about intergenerational fairness then we must design our pension system accordingly and this means taking a long-term view. Early saving and the power of compound interest make it key to encourage some pension funding as soon as possible in life for the millennials and future generations. For government, this is in direct opposition to the fact that keeping the older generation happy means that they will likely vote for you!

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.