By any conventional yardstick, Generation Xers arenot saving enough to retire in their sixties. This is the first finding of a remarkable piece of research by Dunstan Thomas, one of our true “pentechs”.
But have conventional yardsticks have validity to a generation that has encountered more than usual headwinds in their careers, especially their career saving for pensions?
I was surprised to find that the average pension savings pot is worth £186,611 for Generation X men, while their female counterparts have £117,854 in pension savings. Where you live is a more significant factor in determining pension size than age within this generation: Gen Xers living in London have an average of £223,790 saved so far, whereas in the West Midlands retirement savings are less than half that at £103,746
But these figures are still a long way off the £700,000 it’s estimated is needed to have saved independently for the PLSA Retirement Living Wage (around £24,000 pa).
By any conventional yardstick, Generation X is not going to be retiring in comfort in their sixties from their pension savings.
Yet Dunstan Thomas found that well over half (58 per cent) of Gen Xers were happy with their ‘current income and living arrangements’. This economic happiness index rises to 60 per cent for the oldest sub-group captured in the study aged 51 to 54.
So the big question for me is whether Gen X are complacent or resourceful.
Has Gen X been feckless and complacent in its savings habits?
Gen X’s workplace pension
Defined Benefit schemes undoubtedly created a culture of reliance among many people in the UK. One of the worries is that those who are enrolled into what many still call a “company pension scheme” think that that is job done. Enrolling into a lifetime in a Government job with a career average defined benefit at the end of it is pretty well “job done”. Enrolling into a DC workplace pensions where only a proportion of your income is pensionable is not the same thing at all.
Typically you and your employer are paying 25% pa in national insurance contributions and only 8% into a workplace pension. Go figure whether your workplace pension is going to fund your retirement. If we are honest, the amount that should be going into private pensions is that 25% and if we only paid 8% in national insurance, then we could see AE contribution rates above 20%.
Gen X can look at these numbers and legitimately ask whether getting to know the workplace pension is the priority. Perhaps more important is their entitlement to the “National Insurance Fund”.
Gen X has to get lucky or be smart about workplace pensions. There are employers which will make it easy for you to save 20% into your DC plan and employers (principally the Government) who will guarantee you a living wage in retirement, but to get these benefits most people cannot rely on their employer for financial security in later life (and it is a myth that many ever could).
Dunstan Thomas‘ research is very illuminating. It finds that those who have had job stability have fared well but those who haven’t have found their retirement savings a casualty of redundancy
Over four in ten (42 per cent) Gen Xers have been made compulsorily redundant at least once and 21 per cent have accepted voluntary redundancy. The average pension value for those hit by one or more compulsory redundancy events is £120,634, as opposed to 39-54 year olds that have not been exposed to this job shock who hold nearly twice as much in their pension pots at £202,017.
Those exposed to voluntary redundancy fared little better. The average pension pot size for those taking voluntary redundancy is £138,834, compared to those that had not been exposed to voluntary redundancy whom had nearly £39,500 more in their pot at £178,329
The argument that a pension is a retention tool is rarely trotted out these days. It seems that job mobility comes at a price of later life security but Gen X has had little control over their CV, let alone their Pension CV. It could be argued that they are a generation for whom the link between a steady job and a proper pension has really broken down.
Children with “Deferred adulthood “
At a recent FCA event, the message about millennials was clear, they are not clearing out into adulthood , they are staying more dependent on family because of housing. The Dunstan Thomas research bears this out and points to the financial strain on their parents (who might otherwise be saving more for later life).
Nearly a third (32 per cent) of the 2011 39-54 year olds captured in this nationwide study have a child over the age of 18. Of this group, the average amount given to adult children by their parents is £142 per month, rising to £299.80 amongst Londoners.
For Gen Xers which are parents, the level of financial support given to their adult children rises with total household income, so that those with a total monthly household ‘take home’ income in excess of £5,000 hand over an average of £365.30 each month to their adult children.
Pensions stalled by the great recession
Gen Xers were the age group most exposed to financial disruption during the Great Recession from 2008-2013 because of their age at the time (they were 28 to 43 when it started). The study found that nine per cent of Gen Xers saw ‘a major impact with retirement savings going on hold for all or nearly all’ of the infamous five-year downturn.
One in seven (14 per cent) self-employed Gen Xers froze all retirement savings during most or all of that period. 15 per cent of Gen Xers with a monthly household income of £4,501-£5,000 today, recorded halting pension contributions for most or all of this period, confirming what many reported at the time; that the Great Recession was the first downturn that hit middle and high-income family incomes exponentially.
I think it harsh on Gen X to consider them feckless and complacent.
Is Gen X resourceful enough to be self-reliant?
Despite the aforementioned happiness with their current financial well being, The survey does show Gen Xers have little confidence they can be reliant on what they have or are saving.
Over half (55 per cent) of all Gen Xers don’t think they are saving enough to maintain their lifestyle in retirement and over a third (34 per cent) think that situation won’t have improved by the time they actually retire. This pessimism drops a little for the oldest Gen Xers (aged 51 to 54), 41 per cent of whom don’t think they will have enough to retire without reducing their living expense
How do we marry a general sense of financial well-being with this admission?
The alternative to regarding Gen X as complacent and feckless, is to consider them resourceful.
- Can Gen X use their housing equity to plug their income shortfall?
- Will their increasingly robust health enable them to work longer?
- Will they be able to enjoy wealth cascading down the generations as John Major told them it would?
- Has Gen X got the dynamism to keep saving long enough to be able to retire on what they’ve invested?
If we are to avoid a generation that over-relies on pension credit and burdens its children with its later life impoverishment, we have to believe the answers to some if not all of these questions are “yes”.
I think we generally underestimate the resourcefulness of people to find a way- Gen Xers are no exception.
Complacent or resourceful
What comes out of this research is the decreasing importance of financial services to the retirement planning of Gen X. Private pensions are likely to play a smaller part in GenXers retirement than they are doing for the boomers and their parents.
Will the enormous amount of wealth tied up in our housing stock be mortgaged to pay for GenXer’s retirement bills,?
Will GenXers find ways to mitigate the cost of care and the impact of capital taxes so that they can retire off their parents wealth?
Will Gen Xers remain in the workplace, working alongside their children and grandchildren? Will we see the maximum age for auto-enrolment increase beyond state pension age and will people still be incentivised to save beyond 75?
GenXers – complacent but resourceful?
I suspect that the answer to the exam question is that most GenXers are either strategic planners, in which case they’ve been careful with their money and chose a career on pension grounds , or have been dynamic enough to have got on with adulthood confident that they will find the resources to have a decent later life somehow.
The latter group will look at the future as a challenge and be resourceful in how they organise their later life. The former group will already be planning for the longest holiday of their life.
There is however a third group who are neither strategic or dynamic, who may have no prospect of an inheritance and no equity in their property. This group will not have the comfort of private pensions to fall back on and will be dependent on state pension and pensions credit.
It is of course possible to have a very happy retirement on state pension and pension credit but for many people, a means tested retirement income with little value in going to work , may not be a prospect to look forward to.
Which is why we need to focus particularly on the 40% of Gen Xers who do not feel financially comfortable about the future. We cannot allow such a large chunk of a generation to feel they are left behind, we must build the support mechanism for these people that gets them through the Strait of Hormuz and happily into the wide ocean of a satisfying later life.
And for generations to come?
Are private pensions the answer for these people? I suspect the answer to that question is only a partial “yes”. I am more worried about the generation coming behind Gen X for whom the residual benefits being enjoyed by Gen Xers may have quite dissipated.
The long-term solution for future generations will not depend on the re-cutting of the existing cookies, but on a fundamental increase in the profitability of UK PLC. By that I mean real long-term growth built on a sustainable platform. And the biggest contributions boomers and Gen Xers can make to our children and grandchildren is to make sure that we leave them a cleaner , healthier planet.
Thanks to Dunstan Thomas
Thanks to Dunstan Thomas for letting me quote their research. Thanks in particular to Adrian Boulding for his inspirational thought leadership!
I will be writing more about their research in future blogs