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Why baby boomers will be the last generation to have good pensions

Baby boomers will be the last generation to have good pensions. Having started work between around 1960 and the mid-1980s, older members of this group are mostly retired and even the youngest are in their 50s and likely to retire in the near future. Their well-off position is no thanks to their own doing, however. But – critics will be sad to hear – a result of good fortune.

Boomers are often accused of being a pampered generation which has been favourably treated throughout their lives compared to the preceding and subsequent ones. They have not had to fight in wars like their predecessors and they have enjoyed the benefits of the welfare state, access to free education and rising house prices. While it is wise to be cautious about making sweeping generalisations, it can be argued that many among this cohort of people have benefited from an extremely favourable pensions environment that will almost certainly never return.

In the immediate post-war period British employers increasingly took a paternalistic attitude to their employees. This reflected wider social attitudes with the solidarity shown between different classes and backgrounds during the war, which made a marked contrast with the economic hardships and conflicts of the 1930s. A relatively stable economic and business environment during this period gave fertile ground for this paternalism.

The treatment of retired workers was an important aspect of this approach. A common ideal was that in return for many years of loyal service an employee should be able to enjoy a comfortable retirement with a standard of living not dissimilar to that they enjoyed while working. The provision of pension schemes by organisations soared. Only 2.6m employees were in pension schemes in 1936 but this figure had increased to 11.1m by 1963 and subsequently remained at roughly this level throughout the rest of the 1970s and early 1980s. Consequently, most baby boomers who started work for medium and large organisations, as well as many small ones, will have entered an occupational pension scheme.

Naturally most young people will have taken little interest in their pension plan but the baby boomers generally benefited from excellent schemes. A typical arrangement between the 1960s and 1990s was for the employee to receive a pension of two thirds of their final salary on retirement after 40 years service. This would be in exchange for a modest employee’s contribution, often of the order of 5% of their salary. The benefits were underwritten by employers who generally paid a much larger contribution than the employees and took all the investment risk involved. The contributions were pooled and invested for the long term largely in the stock market.

Generally the system of providing these defined schemes thrived until the 1990s to the extent that the British pension system was often said to be the envy of the world. Stock market booms in the 1980s and 1990s allowed companies to easily invest employees’ pensions and afford these schemes. Indeed, some ceased contributing to them at all as a result. This became so common in the 1990s that the phase “taking a contribution holiday” went into fairly common usage.

Changing climate

But these kind conditions were not to last and things started to go very wrong from the late 1990s for a number of reasons. The Blair government substantially increased tax on the dividends being made by pension schemes, new accountancy rules started to show them in a much more adverse light in company accounts, the general burden of regulation and government interference in schemes greatly increased and investment returns in the years after the millennium were very poor.

Chancellor Gordon Brown axed tax relief on dividends paid to pension funds when he was in charge of the public purse. EPA/Gerry Penny

Many organisations started to conclude that these schemes were a luxury they could no longer afford. Organisations initially tended to close the existing schemes to people joining the organisation and instead directed new entrants into inferior ones where company contributions were much lower and the employees had to take all the investment risk.

By 2007 less than a third of schemes were still open to new entrants. By 2014 only 13% of schemes were still open. High quality organisational schemes have now rapidly become unavailable to people joining the workforce or changing jobs. Given that this is much more common among younger people, it is clear that the generations following the baby boomers are also much less likely to be in high quality schemes.

Declining returns

Another trend is the reduction in the value of the benefits accruing to existing members of defined benefit schemes. There are many approaches to doing this, for example, increasing the retirement age, reducing the rate at which pensions accrue or capping the amount of salary that is used to calculate the pension.

The general idea is to reduce the cost of the scheme as much as possible without unduly upsetting the employees – rather in the spirit of the approach to taxation of Louis XIV’s finance minister, Jean-Baptiste Colbert, who said:

The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.

Organisations are unlikely to reduce benefits that relate to the past service of employees. Instead, cuts normally apply to benefits due to be granted on future service. So the baby boomers have largely escaped as their working lives are largely or entirely behind them. They were of the right generation to benefit from the great boom in defined benefit schemes, without suffering too much from their subsequent collapse. As in other areas, the post-war social and economic trends worked greatly in their favour.

It is, however, hard to attribute any blame to the baby boomers for their good fortune in this respect. Given the general lack of interest in pensions, the vast majority of baby boomers probably have little idea of how fortunate they have been. Similarly, many younger people are unlikely to be aware of how tough their retirement may prove to be.

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