‘Boomers’ to ‘zoomers’: the turning tide of the pensions industry

Here at Entrust we recently celebrated our 30th anniversary and I penned an article looking at how the pensions industry has changed over the last 30 years. While I took the time to look back over the last three decades, it is also worth looking into what the future may hold for our industry and what key drivers exist.

One interesting theme is the sizeable amount of surplus money within the Defined Benefit (DB) pensions industry due to the good regulation and efficiencies we’ve seen over recent years.

On the surface, the gilts crisis of Q3/Q4 2022 which resulted in the DB pension industry losing £425bn from their asset value was a sizeable dent. However, what softened the blow considerably was the fact that the industry also managed to lose the rather larger number of £575bn from its liabilities. The result, a £150bn gain straight into the pockets of the industry, in addition to other surplus funds, which means a total of £225bn in surplus. This is great news, but the question facing the industry now is what can be done to ensure this surplus doesn’t burn a hole in its pocket.

In short, the ‘zoomer’ generation may be in line to benefit from the efficiencies and good regulation that have come to characterise the last 30 years of ‘boomer’ generation DB retirement provision.

The ways of working in the ‘boomer’ generation (broadly defined as being born from 1946 to 1964) are markedly different to those of today. Back then, people tended to stay in one job for a long time, often their whole career. If for whatever reason they became unfit to work, their industry would usually look after them with incapacity pensions paid early with no penalty for early receipt. It was a cradle to grave lifestyle almost completely unrecognisable to their descendants. Around 30 years ago, the DB pension schemes which underpinned it all became underfunded and unaffordable for many businesses, as evidenced by over 5,000 DB schemes in the safety net Government compensation scheme, the PPF.

Fast forward to today, the working landscape looks very different for ‘zoomers’ (Gen Z, born between 1997 and 2012). Nowadays, people move jobs more often, whether for progression or a complete change of career and are also working and living longer than in previous generations. These are sizeable factors in why ‘zoomers’ don’t benefit from their pensions as much as their ‘boomer’ predecessors as the gig economy has come to replace the coal pit economy.

So how could this £225bn pot of surplus money help the ‘zoomers’?

Alongside better regulation of the DB environment, the pensions industry in the form of the Pensions Regulator, has enjoyed considerable success achieving auto-enrolment of the UK workforce into pension provision taking coverage from 2.1 million in 2011 to 21 million in 2019. Inevitably, outside the public sector at least, this is Defined Contribution (DC) in nature rather than DB. With DC, an individual pot builds up with contributions of a defined amount for a particular worker. DB is rather different with one often very large pot for all the members of a particular DB scheme. When it works, DB is better for members, but it is a model that just doesn’t travel to today’s generation so broadly auto-enrolment is DC. Employers can auto-enrol workers using DB, but this is very much the exception rather than the rule.

Happily, one popular suggestion for DB surplus is to redirect it towards ‘zoomer’ auto-enrolment contributions. First the DB scheme must be made secure with a Surety Pension Bond or similar contingent asset (like security over sponsor premises) sitting behind the scheme sponsor. The scheme’s investment strategy must then be made rather prudent, looking not unlike insurance company reserves. There might be some added protections for current scheme members, like more generous pension increases. And then DB surplus could be redirected from the ‘boomer’ to the ‘zoomer’.