Intergenerational (un)fairness in pensions – can we improve outcomes for Gen Z?

Having recently returned to work after having my second child, I find myself preoccupied by the needs and demands of the next generation.

Admittedly this is mostly centred on challenges such as encouraging my four-year-old to eat a vegetable, rather than her prospects in retirement, but perhaps I ought to be giving her pension more consideration.

The Pensions Policy Institute (PPI) has released a report on the unique challenges faced by Gen Z in planning for retirement. The report, sponsored by the Institute and Faculty of Actuaries (IFoA), sets out findings which suggest the current model for retirement in the UK may not offer good outcomes for Gen Z, individuals born between 1997-2012. 

As we know, defined benefit (DB) pension provision is becoming rare, with DB schemes open to new members rarer still. This means that the security of a guaranteed income for life in retirement is a privilege enjoyed largely by the older generation. It is sometimes forgotten that DB scheme membership often also includes valuable associated benefits such as protection in cases of ill health or redundancy, creating further disparity between age cohorts. 

Younger generations are primarily offered a defined contribution (DC) pension, with the investment risk borne by the individual. The success of DC provision relies on the individual being able to save enough in the first place. Despite advances made through auto enrolment, younger generations face wider challenges when it comes to making sufficient pensions contributions.

The PPI report portrays the characteristics of Gen Z with nuance, by way of four fictional personas, and works through the issues they each face in different stages of life with regards to retirement planning. In current times, cost of living and property prices will be familiar refrains. But the report also highlights unique challenges faced by Gen Z specifically in relation to pensions, including:

• Distrust of financial institutions from growing up through the 2008 financial crisis and COVID-19, and bearing the ongoing impact of these in their careers and lifestyles. Combined with consuming more, potentially unreliable, information via social media, Gen Z’s financial behaviour and decisions could be significantly impacted.
  
• Changes in working patterns, for example the gig economy and flexible working, meaning Gen Z are more likely to have multiple small pension pots, requiring careful management so as not to be eroded by fees over time.
  
• Shifts in family set up, for example delaying getting married and having children, impacting financial priorities compared to previous generations.
  
• Increasing longevity and rising state pension age, meaning younger people are at higher risk of outliving their retirement savings.

Throughout my career, I have thought that intergenerational fairness is the elephant in the pensions room. I remember a flurry of activity in 2016/17, when The Pensions Regulator (TPR) announced that DC pension membership had overtaken DB. The Commons Work and Pensions Committee started an inquiry, and the IFoA set up a policy group to explore the issue, but I do not remember much tangible action.

I was heartened to hear about the Royal Mail Collective Defined Contribution (CDC) scheme that launched in October 2024, discussed by my colleague Callum Robertson in his recent blog. He highlights that whilst CDC schemes present their own intergenerational fairness issues (those retiring sooner may receive greater value than younger generations retiring later), they do at least provide a potentially more attractive risk sharing option not previously available to younger savers.

Then, at the end of last year, the Government announced an indefinite delay to phase 2 of their Pensions Review, which was expected to “consider further steps to improve pension outcomes, including assessing retirement adequacy”. The delay was met with disappointment across the industry, with commentary around damage to industry confidence, a looming pensions crisis, and a missed opportunity to reform a retirement model which is not fit for the current workforce. Echoing these concerns with the release of the PPI report, the IFoA say they “would urge policymakers to consider how a modern pensions system might better support Gen Z now, and encourage them to consider how their approach to pensions saving will affect them in later life”.

In order not to disadvantage younger generations, it is a clear a change in approach to retirement is needed. Pension provision for Gen Z and beyond must take heed of the generational shift in work, family, attitudes and behaviours, as well as the current economic climate. While we await direction from legislators, can employers play a role in improving outcomes for their younger employees?

The PPI report suggests a number of targeted measures, some of which employers can take forward. I also develop on some points from my colleague Eilidh’s blog from last year, in the context of pensions equality.

• Flexibility in pension provision – consider accommodating career breaks and other life events to help maintain consistent contributions.
• Digital communication. DB members can afford to “switch off” from thinking about their pension in a way that DC members cannot. Tailored digital content and education can better reach the younger audience and combat poor information online. Strong governance and a good default option remain essential.
• Be transparent. There may be different pension arrangements for different cohorts of employees, and trying to hide this fact can be unhelpful. Empower employees with knowledge so they can make their own informed decisions. For example, if your legacy DB scheme includes protections against ill health, is your DC membership aware that income protection is an important safeguard that they may need to procure privately through insurance?
• Consider the world beyond DB vs DC. CDC need not be restricted to Royal Mail, and there are other options in terms of holistic financial health. Empower your DC members to be able to save enough. Beyond paying competitive and fair salaries, you could offer financial planning drop-in sessions that help employees find ways to put more in their pensions.
• Make it easy for employees. If you don’t already offer salary sacrifice, why not? It’s a cost-effective way to offer better value to employees. Another way to encourage adequate saving may be offering bonus waiver, or the option to sign up to an automatic contribution scale (where employee contributions increase automatically by, say, 1% a year).

Intergenerational fairness is a complex issue that goes beyond just pensions and is not one that will be easily solved. However, systemic change is required if we are to protect the financial future of younger generations.

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