Queens’ paradox: young people and the future of pensions

Answer

Introduction

“Who wants to live forever?”

This immortal line from Queen is an ode to youthfulness. Yet this year, a different Queen is on course for a 70th anniversary, in what will be a celebration of service and longevity.

The same paradox – youth and durability – plays out in pensions law.

Pensions law is a regulatory thicket, with entangled layers of regulation in order to protect pension pots (following high-profile scandals involving the likes of Phillip Green), ensure that they are safely administered and facilitate hard-earned retirements. Pensions law, then, is an area that largely focuses on the long term.

This article, however, will chart an alternative course – the interests of the younger generation. We will be navigating economy-bending technologies such as cryptocurrencies, discovering how the expectation of a ‘career’ has been mauled by millennials, and finding out what defeating death would mean for the pensions industry.

Having touched on content, the aim of this article is twofold. First, to introduce key concepts in pensions law. But this taster will also be combined with a commercial awareness piece. We will explore cultural developments and consider how these may influence market trends.

By way of background, there are two main types of UK pension schemes:

• Occupational pension schemes that are set up by employers (although the assets are kept separate and managed by trustees) to provide retirement benefits to employees.
• Personal pension schemes that involve a contractual arrangement between an individual and an insurance company (into which the employer and employee contribute).

Occupational schemes can themselves be divided into a further two categories:

• Defined benefit schemes, where the member is promised a defined level of benefit when they retire.
• Defined contribution schemes, where the member’s ‘pot’ (theirs and their employer’s contributions, plus investment returns) is used to buy an annuity from an insurance provider at retirement or is drawn down during retirement.

In an era of dopamine-on-demand, the psychological profile and outlook of young people may not be suited to the slow burn of a pension scheme

In 2011, Erik Finman undertook a financial transaction at just 12 years old. It should not, however, be his age that surprises you – it should be what he invested his money in. Erik bought $1,000 worth of bitcoin. Today, Erik holds 446 bitcoins – valued at $4.5 million.

Erik’s decision is, perhaps, indicative of the younger generation more generally. In the age of Instagram, likes and digital validation, there have been concerns that the youth are too easily steered by instant gratification. To cut to the chase, slow and steady pension schemes may not be that attractive.

Where trustees are involved (ie, where occupational schemes are concerned), they have fiduciary duties – such as to act in the best interests of the scheme beneficiaries – and powers, for example to invest the scheme assets so as to generate a return on the contributions provided by participating employers and scheme members. Many schemes, though, give trustees the ability to delegate these investment powers to an investment manager. This makes sense, in that the reigns will be handed to an individual or entity with specialist investment expertise. So could investment managers back a more desirable horse for the younger generation?

While cryptocurrencies can yield impressive gains, they are also volatile and prone to ‘dips’. This instability seems incompatible with the very notion of a pension. Imagine that you are days away from retirement, and that you have been complying with the mantra of ‘No Carbs Before Scarbs’ ahead of a retreat for the foreseeable to Scarborough, North Yorkshire. You can almost feel the silky sands between your toes, but then half of your pension is wiped out due to the plummeting value of a cryptocurrency.

Given that we are seeing investment decisions shift to take account of environmental, social and governance considerations, however, these decisions may too soon have regard to cryptocurrencies in order to foster engagement with younger members. It is here that the Pensions Dashboard – a digital hub for all your pension information, available at the tap of a finger – has the potential to become a valuable resource in overseeing investments. 

Young people are snubbing traditional, linear career paths to explore possibilities and pivot between occupations

The modern career is, puzzlingly, not really a career – at least, in the conventional sense.

We have seen ‘The Great Resignation’ – an outcry of dissatisfaction as people grapple with grand questions of identity and purpose. Who am I? What am I good at? What do I want to do and how do I want to spend my time? We will also have to chuck stunningly clever robots into the mix: automation encroachment will lay bare the need to reinvent ourselves and reskill. Strikingly, the average person will have 12 jobs during their lifetime. In short, people are moving jobs – a lot.

It is here that we approach the idea of a ‘transfer out’. This allows an individual to transfer the benefits that they have accrued under their current scheme to a different scheme – for example, when the individual switches jobs to a new employer. This allows the individual to retain credit for the benefits that they have built up. Think of it as like having a loyalty card at your favourite coffee shop – each time you visit, the barista stamps your card. The next time you visit, the coffee that you receive is awful, and so you decide to take your business elsewhere. A ‘transfer out’, for the purposes of this analogy, would allow you to keep the stamps that you have accumulated and use them at the new coffee shop.

With the younger generation increasingly being vocationally fluid, transfers out may be anything but on the way out, with individuals regularly relocating the money that they have saved up under one scheme to another. It is here that an ominous side-effect also emerges from the shadows: fraudsters could capitalise by offering transfers to scam schemes.

We may all, soon, be ‘young people’

‘Amazon’ used to mean an immense river, gushing from the migraine-inducing Andes to almost other-worldly rainforests – now it means an online retail colossus. ‘Space’ used to mean the plastic key that you tapped on your keyboard – now you can delve into the cosmos on commercial flights. ‘Immortality’ used to be something that we watched heroes embark on perilous quests in search of – now it appears to be a fashionable hobby for billionaires. The likes of Jeff Bezos – not content with conquering the final frontier – have turned their attention to finality.

Human-machine interfaces, biometric data and genetic modifications are just some of the advancements talked about in the healthcare sector. We will not here be deliberating the ethics of these technologies, and a truly ‘deathless’ society is likely a while away, but the point remains the same – people will live for longer. Having set the scene, it is now time to look at the pensions point of view.

First, it is likely that the minimum pension age – the age at which members can start receiving their pension (this is currently 55 but will be 57 from April 2028) – will increase. This is because, as people will be living for longer, they will be receiving benefits for longer as well. This, in turn, could lead to pension pots being depleted as more money will be being paid out: at a time when defined benefit schemes are already facing ‘deficits’ (the difference between what a scheme has promised it will pay out and what the same scheme is capable of paying out).   

Further, many schemes provide benefits for when a member is forced to leave the workforce early due to ill-health or injury. These ‘ill-health benefits’, however, could cease to be relevant: should breakthrough medical innovations be made, equipment may exist to detect diseases at preventable stages. From an actuarial perspective, this data (privacy permitting) could also be used to generate more informed assumptions as to the expected amount of benefits that a scheme will need to pay out in the future. Injury benefits, meanwhile, may not be future-proof in that bionic limbs could enable a return to the workplace.   

Conclusion

Given that every UK employer must now automatically enrol jobholders in a pension scheme, most young people will likely have a pension to their name. However, there may be low engagement with that pension, pensions may get ‘lost’ when flitting between jobs (with nearly £20 billion in unclaimed pensions in the UK), and improvements in health may radically transform what benefits are provided and when.

James Flint is a trainee solicitor at Burges Salmon LLP.