View the article online at http://citywire.co.uk/money/article/a886351
How long can babyboomers expect a 'free lunch'?
The pension demands of older generations are hitting the retirement prospects for young people, says a report for Labour.
Younger people may never be able to retire if the baby boomer generation ‘keeps asking for a free lunch’ when it comes to pensions, according to an independent review.
The Independent Review of Retirement Income, commissioned two years ago by the Labour party and chaired by David Blake of the Pensions Institute at Cass Business School, has warned a generation faces working until they drop as the state pension age pushes up and their personal pension saving fails to fund a decent retirement income.
In the wide ranging review, which follows the government’s decision to relax access to pensions through new freedoms, Blake set a bleak scene for future retirees.
The scene is being set by politicians eager to win votes who reluctant to ‘adopt sensible long-term solutions to the problems of pensions…especially it this involves sacrifices today’ that could alienate voters.
Blake said this had a ‘fundamental consequence for intergenerational equity’ as ‘every generation passes the consequences of its own failures down to the next generation’.
True to form, the babyboomers are now handing down the cost of failing to increase the state pension age sooner, meaning younger people are faced with covering the state pensions of a large generation of people who are living longer than ever before.
There is a fear that the costs will be exacerbated by last year's pension freedom reforms as babyboomers who are given access to their savings, will spend it and then fall back on the state.
‘While this can be a small problem when a population is growing, it becomes very severe when a population is rapidly ageing,’ said Blake in the report.
He said the cost of funding retirement ‘will be even more expensive for the next generation to provide if significant numbers of babyboomers run out of money and demand that the next generation provides them with an income for life to keep them out of "poverty"’.
‘For how much longer can the baby boom generation keep asking for a free lunch from the next?’
The report said there is a demographic risk that ‘younger cohorts refuse or are unable to honour the implicit intergenerational contract that underlies many pension schemes’ because there are too few people in work to cover the costs of retirees.
Steve Lowe of insurer Just Retirement said if retirees mis-used the pension freedoms to blow their savings it would have consequences not only for them but other generations.
‘Those at risk of poor [retirement] outcomes are mass market defined contribution customers with pension assets of between £30,000 and £100,000 who don’t feel they can afford advice but won’t receive additional state help,’ he said.
‘Poor decisions by this kind of pension saver will have massive implications later on, not just on their own living standards but on the finances of the whole country and subsequent generations who may be forced to bail them out.’
It is not just a rising pension bill for older generations that younger people face, the report suggested that they will also have to accept that the government will have to ‘increase the state pension age even more rapidly than is currently planned’.
The upshot is that employees will have to remain in work for far longer or they will have to save far more into their pensions if they have any chance of retiring at a date of their choosing, or at all.
Black noted ‘the risk that employees can no longer afford to retire’ given the level of contribution needed ‘to deliver an adequate pension’.
The report recommends that worker should save 15% of their salary in order to fund a decent retirement and the government should adopt a ‘national retirement savings target’ of 15% of lifetime earnings. It would be achieved through ‘auto-escalation’ – the practice of automatically increasing workplace pension contributions – and would aim to ‘avoid future pensioner poverty.
Richard Parkin, pension expert at Fidelity International, said a sudden jump to 15% contributions would be advisable considering auto-enrolment is in its infancy, with contributions set to reach 8% in 2017 (made up of 4% employee contribution, 3% employer contribution and 1% tax relief).
‘By setting themselves the goal of putting 1% of any pay rise into their pension each year, they can quickly find that, with the help of their employer’s contributions and tax relief, they are getting close to the 15% target that should ensure a comfortable retirement,’ he said.
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