Clash of Generations

Today’s FT carries a fascinating article by David Willetts (Clash of Generations) who is the Conservative Party’s expert on pensions. He is naturally going to take a negative view of the way our governing party handles pensions but the information in his article provides a fascinating insight into the extraordinary combination of circumstances that has made one group of the UK’s 50-plus so wealthy. In contrast, younger people are having a financially tough time; an experience that is set to intensify.

Non-UK readers might wonder what this has to do with them. Well in differing degrees, what is happening in the UK is being replayed throughout Europe, US, Canada and Australia. Another mystery might be why the date 1997 appears so often – it is when our governing party, lead by Tony Blair, was elected.

Because the FT is subscription only I have written much of this blog posting, however, I apologise to the FT for cutting and pasting some sections of the article.

The old myth was that Britain is society divided by class. Wrong, we are living in a society increasingly divided by age.

Some facts.

The total net financial worth of people in Britain is over £5,000bn and is broadly divided into three main categories.

Savings accounts, stocks and shares (£1,200bn)
Funded pensions (£1,300bn)
Housing net of mortgages (£2,500bn)

In 1997 the value of pensions was about the same as that of houses. It is now twice the size. It doesn’t take a genius to work out that this results from a massive increase in the price of houses and a decrease in the value of pensions. As my favourite Professor of Finance once said: “Trends go on until they stop”. This might be happening in the UK. The OECD has just published a report about the UK that says: “policy makers currently face a slowdown in growth, in part caused by an overdue cooling of the housing market. This raises the issue of the risk of a more pronounced housing market correction”. The financial implications of such a correction do not bear thinking about so I will move swiftly on!


Some have more than others.

The top quarter of 50-69-year-olds own 84% of all the financial wealth held by that age group. I have labelled this lucky group the Charmed Generation. If you want to read some more about them then have a look at this article.


Pensions

Defined benefit pension are the type where you get a guaranteed amount of money when you retire, irrespective of what happens to the stock market. In the private sector they had fallen by 60% since 1995. There are perhaps 4 million private sector employees who are in such schemes, less than a quarter of total private sector employment. On current trends there could well be only 1 to 2 million private sector employees who are active members of defined benefit schemes in 20 years' time. It is estimated that 30% of men in their 50's are members of such schemes but less than 20% of men in their 20's. It is older workers who have this increasingly rare and precious form of pension provision.

The classic response of a company to the pension crisis of the past few years has been to close its pension scheme to new members, plug the deficit with an injection of company funds and set up a new, much less valuable, Defined Contribution pension for new employees. This adds up to a very dramatic shift in resources across the generations. The traditional final salary scheme remains for established older employees. Profits from the company as a whole are diverted into plugging the deficit in their scheme. New employees who are much younger have a much less generous pension to look forward to, or rather not.

The pensions paid to people who work in the Public Sector (employed by central or local government) is another story. They currently get a defined contribution pension and the chance to retire nearly a decade earlier than people in the private sector. This strange, some would say iniquitous situation, will be the subject of future postings.


Housing

More than 70% of adults are home owners. It is not just that the value has gone up, the number of home owners continues to rise as well. There are 17.8 million home owners against 16.3 million in 1997, or indeed 15.1 million in 1990. Unfortunately, much of this increase in home ownership results from marriage breakdown. Housing economists calculate that for every owner occupied household which breaks up 1.4 new owner occupiers are created. Willis estimates that 0.5 million of the 1.5m increase in owner occupation since 1997 can be attributed to relationship breakdown. This affects the age when people can afford a property. The median age of a first-time buyer is up to 30. In fact the mean age for a first-time buyer is now up to 34, because it is distorted upwards by the middle-aged return to owner occupation.

In 1985 34% of under 25's were already home owners: this had dropped to 22% by 2003. Among 25 to 29-year-olds owner occupation rates are down from 62% in the mid-80's to about 52% now. In 2002 only 37% of new households could afford to buy a property compared to 46% in the late 1980's.

There is a fortunate group of the 50-plus baby boomers who got into the housing market in time to enjoy the enormous appreciation of the past 15 years but it is going to be a longer, slower, and more painful process for the younger generation to achieve home ownership. Another factor that has conspired against younger people is the inflation, or more accurately the lack of it. Inflation works as a very effective device for wiping off the debts of people who have borrowed a lot, to buy a house. So when the 50 plus were buying their houses in the 80's and 90's the effect of inflation was to shrink their mortgage to a fraction of its former size, in real terms. For the younger generation, trying to borrow to finance a house today, low inflation means their borrowings are likely to be almost as burdensome in twenty years' time as they are now. It is all well and good moving to a low inflation world but it is very convenient for the 50 plus that it has been achieved after their debts have been effectively written off. Mr Willitts might rue the day he wrote this statement, if we were to return to the days of high inflation (fingers crossed that we don’t)!


A tale of three Britains (75-year-olds, 50-year-olds and the 20 something)

Does age matter. You bet it does.

A 75-year-old probably didn't build up much of a company pension and may well have rented a property through his or her life. They are unlikely to have much wealth. They are quite heavy users of public services such as the NHS. They are quite likely to be dependent on means-tested benefits as well. They are the prime beneficiaries of increases in public spending.

A 50-year-old is likely to be a member of a good occupational pension scheme. Their house has shot up in value and they are now at the stage where they might well be saving money on top. They have been blessed with some incredibly favourable economic and demographic trends.

Then there is poor old 25-year-old. He or she has had to pay for the university education which the 50-year-old enjoyed for free, so they have just started work with a large amount of student debt. There is no way that as a new employee they are going to have any rights to a decent company pension scheme. Although they still aspire to own their own home it is going to take ages to build up a deposit.

From a marketer’s perspective, which group do you think looks the most attractive? Dick Stroud