Perfect storms and social revolution – the pension’s story

By Ian Davidson, Consultant

The biggest issue in reward is surprisingly, pensions. We are faced with a perfect storm that includes changing demographics with the ratio of workers to pensioners heading to an unsustainable low.  Long term and historic low rates of investment returns linked with rapidly falling annuity rates meaning fewer bangs for your pension bucks.  The level of state pension provision in many European countries such as Italy, France and Greece is unsustainable in good times let alone the current economic meltdown.  This is leading to a relatively rapid increase in state retirement age (and some would argue nothing like fast enough to match the demographic and economic environment) and attempts by some countries, such as the UK, to move pension provision for anything over the safety net limit, to employers and employees.

Labour market demographics relating to pensions are moving to the equivalent of the horror movie.  Fewer, younger workers with high levels of debt (caused by a mixture of higher university fees in the UK to mass youth unemployment in Greece and Italy) are supporting higher levels of the non-working elderly population. Job tenure appears to be getting shorter with longer periods of UN or underemployment, as recent UK graduate employment statistics have indicated.  The ability for younger employees to build a retirement pot over a working lifetime has been heavily eroded at the same time as state support is steadily being removed either by real reductions in pension value, means testing of anything over the  most basic pension and increases in state retirement ages.  If this is linked to the increasing cynicism and downright hostility to the entire world of financial services, pensions and investment included, of younger people, that makes retirement savings bottom of any list of financial priorities and thus unlikely to happen until far too late from a cohort of workers who will struggle to support the aging populations across the world.

We also have the unedifying spectacle of late middle aged workers having to support, on one hand their adult children who cannot find well-paid jobs or the ability to purchase or rent their own accommodation alongside financially supporting their elderly parents and other relatives who have too much wealth to be eligible for the rapidly shrinking state care home provisions but insufficient wealth to provide for themselves.  An issue which incidentally will impact on the wealth inheritance of the middle classes further eroding their ability to have a nest egg for retirement.

In general people are living for longer, perhaps much longer as a mixture of improved living standards and innovative medical interventions (soon to be further enhanced by individualised bio-medical approaches around DNA mapping) means that life expectancy is moving in to the eighties and beyond.  The downside of this is the rapidly increasing medical and care costs of an ageing population being funded by a smaller and smaller number of poorer and poorer, indebted younger workforce facing competition for jobs and income from the Asian tigers and BRIC economies.

All these economic factors sit alongside a greater social expectation of a “good” retirement.  Fidelity Investments has produced some excellent research highlighting the gap between what people save for retirement and their expected income at that time against their retirement aspirations.  The gap is vast and growing.  The issue of social revolution arises that when todays older workers see the retirement goalposts being moved further and further away and when they reach retirement their living standards plummet not only way below their expectations but arguably below a subsistence level with the state unwilling or more likely unable to pick up the slack.  How will this massive demographic cohort react?  Who will they blame (because of course there must always be someone to blame) and more worryingly what are they going to do about it?  What about those in work seeing their taxes being used to fund income and the rapidly increasing social care bill for the elderly while they themselves see the pot for their old age reducing to nothing and their own living standards being not only less than their parents (well-paid jobs, accommodation, a secure old age??) and perhaps even less than their grandparents…..

We are indeed, like the Titanic, blindly heading towards the iceberg of demographics.  In some ways we are worse off as those who run governments are well aware of what is happening but turn a Nelson like blind eye towards the iceberg both due to the short term nature of politics and because any of the solutions are so painful no one wants to even think about them let along propose apocopate policy responses.

Even those of us who work in reward can do little against the headwinds of the current economic, social and political environment – we are already in the perfect storm and things can only get worse.

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