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Three policy proposals to jump the generation gap

Self-employment, risky pensions and student debt: some of the problems faced by millennials. But new policy proposals are looking to fix this.

The final report of the Intergenerational Commission, published by the Resolution Foundation last week, triggered debate about whether or not millennials should be handed £10,000 to help them get on the property ladder, pay off student debt or even start a business. The report also contained a number of pension policy ideas to help heal the intergenerational gap. But how effective are they? Here are three main proposals for reform.

The final report of the Intergenerational Commission, published by the Resolution Foundation last week, triggered debate about whether or not millennials should be handed £10,000 to help them get on the property ladder, pay off student debt or even start a business. The report also contained a number of pension policy ideas to help heal the intergenerational gap. But how effective are they? Here are three main proposals for reform.

1. Raise the value of the new state pension relative to median earnings and replace the triple lock with a ‘double lock’.

The problem for the triple lock is it is increasingly seen as unfair, because pensioners now have higher average incomes (after housing costs) than the rest of the population as a whole. This is because it guarantees the state pension will rise annually by at least 2.5%.

A move to a double lock would go some way to removing the effect of triple lock increases. But statistics from the Office for Budget Responsibility show the state pension is set to rise faster than both earnings and prices over the longer term.

If we are going to strengthen the social contract between generations there needs to be a tougher approach. One alternative is to look at a ‘smoothed earning link’, proposed by the work and pensions committee.

This policy means growth in pensions continues in line with earnings only. But if earnings fall behind price inflation, an above earnings increase could kick in. This is until earnings growth resumes; or for as long as the pension remains above a previously established limit, compared with average earnings. When this happens, it would revert to earnings.

This would ensure the state pension rises in line with earnings, rather than faster than earnings. And it also protects pensioners when that earnings peg falls.

2. Require firms contracting for self-employed labour to make pension contributions.

The clear target here is to extend auto-enrolment to younger self-employed workers. The proposals are inventive. But they would be a challenge to implement practically.

For the self-employed that work for several different employers, sometimes only on one occasion, it will be difficult to ensure their pension payments are all going to the same place. It may also mean take-home pay for these workers drops, as employers will need to take into account additional benefits.

Current working habits mean people jump between employment and self-employment. Around 500,000 self-employed people have recently left employment, according to research from the Pension Policy Institute. They are likely to have been auto-enrolled by their employer so making them undergo a second form of auto-enrolment when they become self-employed is counter-productive.

There is merit in giving individuals the choice of which pension provider their contributions are paid to, as part of the process.

A savings system will also need to recognise self-employed people lack certainty and security of income. There is evidence they resist ‘locking away their savings’ and tend to favour investments such as ISAs. To make pensions more appropriate for the self-employed, a pension ‘sidecar’ needs serious consideration. This would allow this group to have a pool of money accessible, at any age, in times of need.

3. Reform pension freedoms to include the default option of a guaranteed income product purchased at age 80.

This policy proposal is aimed at reducing the risks around younger generations’ pensions. According to the regulator’s recent review of non-advised drawdown, 37% of drawdown sales are made without advice.

This is a considerable issue and needs to be addressed. However, solutions here should focus on engagement and advice, as well as some form of default.

The proposal in the paper is very much based on the National Employment Savings Trust Insight Unit’s ‘retirement blueprint’. There is scope for innovation of this type to help people manage investment strategy and income strategy.

Pensions minster Guy Opperman stated last year that a practical means of addressing the new-found choice in retirement could be a midlife financial MOT with an adviser or guidance service.

This is a good idea. It could then help assess an individual’s retirement provision at a stage in their life when they still have time to learn, engage and do something about it.

Jon Greer is head of retirement policy at Old Mutual Wealth.

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