What will retirement look like for millennials?

BY Olivia Utley | OliviaBUtley   /  15 August 2017

As a 23-year-old who thinks only as far as where the next night out is coming from, I found it slightly alarming when a concerned relative cornered me at a family party on Saturday to ask me about the merits of my workplace pension scheme. The truth is that I haven’t a clue how my workplace pension scheme works – and finding out is pretty low down on my proverbial ‘To Do’ list. Quite frankly, although I’d be scared to admit this to my uncles who see pension ignorance as the epitome of irresponsibility, I couldn’t give two hoots about my pension pot, and I really can’t see myself ever getting around to haggling with my employer for a better deal. I tell myself I have good excuses for my negligence. I keep being told, for instance, that my job is about to be taken over by robots who will work 24 hours a day for no compensation whatsoever. Compared to these super-workers, my needs for wages, weekends and inhabitable offices already seem feeble; nagging my employer for yet more perks will surely just fast track me to redundancy.

But there’s another reason, and it’s harder to admit because even I can see it is complacent: deep down, I can’t help thinking that it doesn’t matter what my workplace pension scheme looks like now as people who work hard in professional jobs will always have long and prosperous retirements. My mother didn’t bore her employers about pension schemes when she was 23, yet she retired at 60 and is hardly counting pennies. Why would it be any different for me?

Sadly, there are a good many reasons why. It’s easy to take retirement for granted as a fundamental fact of life: you are born, you get educated, you have a career, you retire and you die. And yet that life trajectory is actually a relatively new concept. Before 1908, there was no such thing as the state pension; if you were a labourer, you would just work until you dropped. Even when the first pension was introduced by Asquith in 1908, it was hardly enough to live on, let alone live well on, and it came with a raft of caveats. It could only be drawn by men over 70 who had worked their whole lives, and, amusingly, even they had to pass a “character test” to establish “good character” before they could receive it. (Unfortunately, there seems to be no record of what it entailed).

It was only in the mid-1940s that pensions started to morph into something resembling today’s system. After the Second World War, thousands of men were coming home from the front line to find that their jobs had been taken by women, and these women were in no hurry to trot back to the kitchen sink. To avoid a generation of young, restless men falling into unemployment, poverty and destitution, the Government had to free up some jobs – and fast. On top of these public pressures, the situation in the private sector was getting precarious. Workers who had just lived through six years of meagre pay were getting disgruntled, but companies still reeling from the effects of rationing could not find the money for pay rises.

The answer to both problems was the introduction of the modern pension. The state could incentivise the elderly to make space for their sons with the promise of a comfortable, relaxed retirement, and companies could replace pay rises with the gleaming promise of hefty pensions – safe in the knowledge that it would be a good many years before they would need to stoke up the money to pay out.

And lo, in 1946, the National Insurance Act was passed. From 1948 (when the act took effect) all working people in Britain would contribute towards their pensions throughout their working lives through national insurance payments, and, upon reaching a certain age (65 for men, 60 for women) they could claim a monthly sum back from the state which would enable them to stop working. Concurrently, private companies started offering schemes in which employees could put some of their earnings into a pension pot, and these contributions would be topped up by generous contributions from the company.

For many years, it worked a treat. The act fulfilled its purpose of freeing up jobs for younger people, and the burden on the state and on private companies was minimal. Pension packages were generous, but with the retirement age set at 65 and life expectancy at around 66, they could afford for it to be. Before death, everyone who had worked hard to keep Britain turning would be rewarded with a few years of relief by the magnanimous British institutions.

Then it all changed. In the latter half of the 20th century, advances in public health, technology and medicine sent life expectancy soaring. Workers (who had once expected a couple of years of relief from work before death) could now look forward to long, healthy and prosperous retirements. It was a golden age for pensioners. By the 1970s, chirpy 60 year-olds were throwing in the towel at work, donning their sports kits, and cycling off to their retirement villages to spend the next 30 years playing tennis and going on cruises. It was, of course, entirely unsustainable.

Half a century later, and both the private sector and the Department for Work and Pensions have buckled under the weight of millions of lycra-clad pensioners. A total of 26 FTSE 250 companies have disclosed pension liabilities of more than £1bn. As of July 2017, fourteen FTSE 250 companies have disclosed liabilities greater than their stock market value. The bus operator ‘Firstgroup’ has a deficit of more than three times its market value, while Go-Ahead Group, Phoenix Group, Balfour Beatty and Carillion all have liabilities that are almost double their stock market value. Across the UK, there is £2.4 trillion worth of pension liabilities, and £1.4 trillion in pension assets. That’s a deficit of £1 trillion – half the size of Britain’s GDP – which simply cannot be paid.

Companies have done the sums and realised they have promised too much to too many people, who are now living too long. In the early 2000s, when this began to dawn on managers, companies began to take tentative steps towards reducing their pension packages for new recruits. They were expecting a backlash, but because they were dealing with young people who often think like me when it comes to pensions, none came. So they sped up the process. Final salary pension schemes – which baby-boomers took for granted – became pretty much extinct, and millennials became reliant on a new, much less generous type of pension, which relies heavily on the volatile stock market.

The Government, as usual, is a few steps behind the private sector. But basic economics means it will have to catch up soon. In the financial year 2014/15, the UK government spent £258 billion on welfare, which made up 35% of all government spending. Of that £258 billion, £108 billion was used to fund the state pension. That means that in 2014/15 nearly 15% of all Government spending went on the state pension.

Successive governments have tried to reduce this, but, as we learnt in June when Theresa May’s policy to scrap the triple lock played a part in costing her the Conservative Commons majority, interfering with baby-boomers’ pensions is political suicide. Politicians – if they know how to fight elections – avoid it at all costs, meaning very few incremental changes have been made over the years. In July, we saw the first ever dip in the pensions deficit, but it barely made a dent. This means that when the pension policy reforms come, they will be drastic. And they will target the millennials. After all, we neither vote, nor give two hoots about our pensions.

109 years after the very first pension was introduced in the UK, and literally everything has changed. The golden age of pensions is coming to an end, and it is looking almost certain that my generation will not have the sort of retirement our parents took for granted.

Perhaps, like our ancestors before us, we will work until we drop. But perhaps, and I’m holding out for this, we will redefine working life altogether. Where our parents and grandparents moved through life on a linear trajectory – birth, education, employment, retirement, death – we could start to mix things up. Instead of ever retiring, we may simply retrain at 60 and embark on whole other 30 or 40 year careers. When the degenerative diseases of the brain are tackled, cancer becomes much more treatable, and gene therapy works its magic, there is the prospect of people being even more active in old age for longer.

It may turn out that retirement as we know it was a historical aberration: perhaps, in 100 years’ time, historians (who used to be dentists or doctors) will write about a funny time in the 20th and early 21st century where 60 year-olds (spring chickens by 2100s standards) simply gave up work.

This country has a serious pension problem, but it arises out of something positive: on average, it is anticipated that millennials will live for 20 years longer than our grandparents. We’ve literally been given a new lease of life – let’s work out how to use it.