If the personal finances of every household could be ranked, the period following the 2008 financial crisis puts the baby boomer on top. There is a counterpoint to this, say campaigners for older savers, which is the level of interest rates over the period. Surely a decade of ultra-low rates favours borrowers and most of them are young.
Likewise, final salary pension schemes, dominated as they are by the older generation, have struggled to bring down their deficits as low interest rates squeezed the return on assets.
A report by the Intergenerational Foundation, a charity that funds research into issues that divide the generations, has found that far from losing out to younger people, baby boomers have proved themselves adept at ensuring they are the winners across many areas of public policy.
Governments, say the authors, have been “tempted by short-term pressures to set rates that clearly disadvantage the young and favour the older generations”. Compare university fees charged at an interest rate of 6.1% with the 2% the elderly are charged on loans to pay for residential care costs.
Another example can be found in the rates of interest offered on state-sponsored savings bonds. The pensioner bond, which was launched by George Osborne and proved so popular it was credited with helping the Tories secure a majority in the 2015 general election, paid a 4% rate of interest. National Savings bonds for everyone else pay a maximum 2.2%.
Worst of all is the huge bill in store for younger people in 30 or 40 years’ time by virtue of the current calculations of future liabilities. Pension liabilities are top of the list, with public sector pensions in particular carrying a heavy cost.
The foundation’s concern is that the government overestimates the state’s capacity to pay for future liabilities by exaggerating how fast the UK’s income will grow over time. If GDP growth is forecast at an absurdly high rate then the income will supposedly be in place to pay generous pension payments in 30 years. If that growth fails to materialise, those who are in their 20s and 30s today will need to find large sums of cash to fill the hole when they are in their 50s and 60s.
The debate centres on the discount rate, which is the calculation of a fund’s long-term growth, which is used to reflect how much money should be set aside today to pay for tomorrow.
Downgrade the discount rate by 0.5% and the government will need to set aside additional pension contributions worth 3% of salaries, it says.
“From this you can see very starkly why representatives of older workers have been lobbying strongly for higher discount rates. If they succeed in keeping discount rates 1% above what they should be, they have essentially transferred 6% of the total pension bill for each of these years from the old to the young, so the young will have to pay this bill,” the authors say.
So it is worth looking at how the discount rate is set. In a review orchestrated by Osborne in 2011, the Treasury said it should be aligned with expected GDP growth of 3%. When the GDP figures for subsequent years showed this to be wildly optimistic, the Treasury had a rethink and reduced it to 2.8%.
Even at 2.8% it is a full percentage point above last year’s growth rate. This year, when GDP growth is expected to be 1.5%, it is absurdly optimistic.
In short, the pension contributions of teachers, nurses and police officers fail to account for how poor Britain will be in 2050 and the paucity of funds available to pay their pensions. The strike last week by university lecturers would appear to sit outside this debate. Like their local authority cousins, the university scheme is among the small band of public sector organisations that doesn’t pay pensions out of whatever it can lay its hands on that year, as teachers and nurses pensions are, but from an investment pot built up over decades.
The healthy lifestyles of most academics mean they (fortunately) live long lives. And with interest rates low, the university pension fund, the USS, has failed to build up a sufficient pot to cover an academic’s extended retirement. Just short of 200,000 workers are affected.
The USS deficit was also £9bn a year ago, but now stands at £17.5bn, making it the largest on record at any British retirement fund. There are those who say the USS should copy the government and adopt a generous discount rate on its £60bn fund. Then the fund’s assets can be forecast to grow like Topsy, closing the gap with £77.5bn of future pension payments.
Pension rules on non-government funds are a bit stricter and so that’s not so easily done. Instead, the USS has opted to follow the rest of corporate Britain and dump the problem on the young. To the untrained eye, that’s not the case. Instead, it appears everyone is treated equally with all scheme members transferring to cheaper private pension plans, which depend for growth on stock market returns.
But the young lecturer, with only a few years inside the guaranteed final salary scheme, is hit much harder than older academics, who will have their long years of service and entitlements in the USS protected.
Such a proposal shows that sharing the problem of ballooning pension entitlements is alien to the baby boomer. Their representatives berate the Bank of England for maintaining low interest rates and when that doesn’t work, reconstitute the pension scheme to the young’s detriment.
In the battle to maintain unaffordably generous schemes, and the USS is one example, the unions and Labour believe they are fighting the good fight, except they have failed on all fronts. The UK has found itself with a private pensions system that is dedicated to feathering the nests of the old, coupled with a public pensions system that will antagonise the young. Public sector pensions can only continue to pay out their commitments if inflated discount rates are imposed on the young, who will have to pay extra into their schemes over a 20- or 30-year period. All of this alongside paying their exorbitant university fees. The generational battle lines are drawn.