It has become received wisdom that the current generation of retirees are probably enjoying the best pensions of any generation before or since.
The remorseless decline of private sector defined benefit (DB) pension coverage, lower interest rates and longer life expectancies are generally assumed to mean that the savings challenge for today’s workers is getting harder with every passing year.
But a very helpful challenge to this over-simplified narrative has come from an important report from the Resolution Foundation published in November called As good as it gets?. The valuable contribution of this report is that it has undertaken very careful modelling of the future pension incomes of different generations over the decades to come, taking account of changes in state pensions, DB pensions and the potential impact of automatic enrolment.
The report comes to the surprising conclusion that “… future cohorts of pensioners look set to achieve fairly similar levels of earnings replacement to those that we have observed in recent years”.
The conclusion comes with appropriate health warnings about the sensitivity of these results to the underlying assumptions about growth, coverage of automatic enrolment etc., but they remain very striking. So, if these findings are true, what are the implications?
First, it is worth saying that for men in particular, the report finds that there will still be a modest ‘dip’ in retirement incomes over the coming years before this starts to recover. In simple terms, this generation suffers from the DB tide having gone out before the defined contribution ‘cavalry’ comes over the hill. This is a group who missed out on final salary pensions but who were not in automatic enrolment pensions for long enough to make up for the shortfall. This group probably needs to be a particular priority for pension policy.
Second, a lot depends on what happens to the state pension, which remains a key element of retirement incomes for many people and for women in particular. The report makes the reasonable assumption that uprating in line with the triple lock will not last beyond this parliament and assumes earnings indexation thereafter.
This is probably the right assumption for a report of this nature, but there remains a risk that if demographic pressure on spending on health, care and unfunded pensions gets too severe, even this level of indexation may come under pressure. Given that we had thirty years of price indexation from 1980 to 2010, we cannot assume that earnings indexation is safe, and without it the picture would look very different.
Third, automatic enrolment and its success remain crucial. One of the reasons why the received wisdom about the pensions of future generations may be wrong is that saving in a workplace pension, even at a modest level, for half a century really does make a difference. Provided today’s new workers do not opt out, the compounding effect of starting early does give some hope to this generation.
Finally, the report itself acknowledges that these findings give no room for complacency. Incomes at retirement may be holding up, but a retirement of 20-30 years with limited inflation protection could have a big impact on living standards later in retirement. In addition, more people reaching pension age having never become homeowners or with outstanding mortgage debt could mean that the call on that income is much greater. And we still know relatively little about the future care costs that people will face in a world of increased longevity.
All in all, this is a great report and well worth a read, and offers a little glimmer of hope amid the winter gloom, but we are by no means out of the woods yet.
Steve Webb is director of policy at Royal London