If you’ve spent any kind of time on social media, you’ve probably stumbled across the “which generation had things the hardest” debate.
The discourse usually focuses on economic matters, such as housing. Younger gens point towards the widening income to property price ratio, while Baby Boomers and the early cohort of Generation X had to stomach a decade of double-digit interest rates.
The truth is that every generation has its own set of economic conditions and struggles. Some aspects of life become easier, other things harder, and fresh challenges or opportunities emerge.
That said, one area where it’s hard to argue that most current workers have received the rougher end of the stick is workplace pensions, illustrated by the Financial Conduct Authority’s (FCA) latest Financial Lives survey.
With no fewer than 147 pages and packed with personal finance data from just under 18,000 people, the report is a hefty read. And one group of stats really stuck out to me. It uncovers a trend I was already aware of but is far more pronounced than I expected.
As of May 2024, two in three adults (65%) who were receiving an income or had taken a cash lump sum from a pension had accessed a much-treasured defined benefit (DB) scheme – a stark figure.
By contrast, only one in four (25%) current workers enjoy such schemes, and the vast majority of these will work in the public sector. What’s more, due to shifts in the workplace pension landscape, this figure will inevitably reduce over the coming years. As the FCA report notes: “Older working-age adults were far more likely to have a DB pension in accumulation than younger adults.”
What the DB to DC pivot means for savers
So, why is this important?
DB schemes are described as “gold plated” for very good reason. Upon reaching a certain age, you receive a guaranteed, inflation-proofed income for life based on your number of years’ service at a company and the salary you earned. In the past this was sometimes based on your final or best salary from your final working years, but career-average earnings are what’s typically used today.
The way DB schemes are calculated, if you accrued benefits over a 40-year career, you’d retire with a pension somewhere between half and two-thirds of your working salary. Should you pass away while in receipt, your spouse or civil partner gets half the income. Once you add in the full state pension, and presume all debts have been cleared, your disposal income shouldn’t drop by much at all in retirement. An alien concept these days and something that would take an awful lot of grunt and savvy investing to match. Even if you only had access to a DB scheme for part of your career, which is likely the case for some older workers, it can bring some much-treasured security and certainty.
DB schemes may be lucrative for workers, but they’re expensive for employers. That explains why practically all pensions that offer future promises – including personal arrangements such as retirement annuity contracts – have disappeared, except for civil servants. Offering iron-clad guarantees comes with significant risks, especially when future variables, notably longevity, are unknown. As such, DB pensions in the private sector have largely been closed to new members for at least a couple of decades.
The workplace pension landscape has since pivoted to defined contribution (DC) schemes, with the FCA’s survey finding that 53% of current workers have such a plan. Instead of securing a future income, you accrue a pot of money, the size of which is determined by how much you save and how your investments perform.
Under auto-enrolment laws, employers must stump up least 3% of qualifying earnings, which is a big help, yet it’s on savers to engage, pay in enough and invest wisely to retire in comfort. Essentially the risk lies with you, rather than your employer. What’s more, as most people now tend to keep their money invested in retirement and draw money out flexibly, the need to pay close attention to your savings can continue for the rest of your life.
Some workplaces are more generous and pay more than the minimum amounts, but not all of them. According to NEST, four in 10 staff work for an organisation offering the baseline 3%.
As auto enrolment only took effect in late 2012, and minimum contribution levels were increased gradually over the first few years, it’s feasible that some members of Generation X and Millennials could’ve spent years missing out on both DB schemes and employer contributions – although we should note that many businesses provided generous DC pensions long before they were forced to.
So, how does auto enrolment stack up against current public sector DB arrangements? In the 2024-25 tax year, staff contribution rates under the NHS Pension Scheme ranged from 5% to 14.5%, while employers in England and Wales contributed a whopping 23.7%. In Northern Ireland and Scotland, employer rates were an almost equally mammoth 23.2% and 22.5%, respectively.
The allure of DB schemes was highlighted in a recent piece published by the Telegraph, titled: “The workers flocking to public sector jobs for better pensions.” It’s safe to say even the most bountiful workplace DC schemes don’t come close to replicating DB benefits.
Retirement crisis…loading?
A report by the Institute for Fiscal Studies (IFS), published in September 2024, noted: “We find that approximately 30% to 40% of private sector employees (five to seven million people) saving in DC pension schemes are on course to have individual incomes that fall short of standard benchmarks in retirement, though prospects look better accounting for partners’ pensions and potential future inheritances.”
By the Pension and Lifetime Savings Association’s (PLSA) calculations, a single person needs a pre-tax income of £14,000 for a minimum standard of living in retirement, £31,000 for a moderate one, and £43,000 to live comfortably. These are, of course, merely guides. One person’s comfort is another’s dystopia, as the saying goes.
However, the FCA’s Financial Lives survey unearthed some pretty bleak stats on how consumers are faring right now, finding that a third (33%) of adults saving into a DC pension had less than £10,000, while 56% had a pot of £10,000+, and 12% had no clue how much they’d saved.
And it’s not just the size of savings that sparks concern, but also the lack of engagement. The research found that fewer than half (45%) had a decent gauge about how much annual income they can expect from their DC pension in retirement, just 30% had given a great deal of consideration to how their outgoings may alter during later life, and only 25% had a clear plan for accessing their DC pension funds.
This data is indeed concerning but not a huge shock. The pension landscape has become progressively knotty and soaked in jargon that laypeople cannot be expected to make sense of it all. It could in fact be putting people off. The government, regulators, investment platforms and pension providers must collectively grab the bull by the horns and create a savings system that people can understand and interact with.
Rock and a hard place
Phase two of the government’s landmark pensions review will home in on pension adequacy – namely whether minimum contribution levels under auto enrolment should be increased and, if so, when and to what degree. Frustratingly, the start of this project was pushed back in December 2024, but Torsten Bell, the pensions minister, recently told Pension Age he hopes to get things moving later this year.
The decisions here, however, are far from straightforward. The government finds itself between a rock and hard place.
On one hand, with businesses grappling with higher taxes and consumers still feeling the pinch from the rising cost of living, especially after UK inflation accelerated to 3.5% in April, the timing to jack up pension payments is far from ripe.
But on the other, in the absence of policy intervention, millions of people risk reaching retirement with insufficient savings to live life on their own terms – some may even face enduring financial hardship. While auto enrolment has proved a roaring success in getting more workers to tuck money away for retirement, sticking to the current minimum combined employer and employee amount, which totals 8% of qualifying earnings, will leave many people short.
Play the hand you are dealt
Having a DB scheme can take the heat off saving and investing for retirement, but not all is lost for DC savers. We must make the most of the cards we’re dealt and use what’s at our disposal in the most effective way.
On a brighter note, pension dashboards – which will enable you to see all your retirement savings in a single, online hub – could go live in late 2026. Given the project has witnessed several delays since it was kickstarted, whether the deadline will be met is another matter. In any case, once they are up and running, dashboards should be a major step forward in helping people engage with their savings.
In addition, as the IFS report notes, Gen X and Millennials may stand to benefit from Baby Boomers’ fortunes in the shape of sizeable inheritances. However, we must note that DB schemes in payment cannot cascade down generations, and most pensions will lose their inheritance tax (IHT) exemption in two years’ time.
The current suite of DC offerings, such as workplace pensions and self-invested personal pensions (SIPP), may be short on promises and guarantees, but for most people they are still the most effective savings vehicle to build wealth quickly.
Starting as soon as you can, maximising employer pension contributions and upfront pension tax relief, consolidating several pots into something like a self-invested personal pension (SIPP) where appropriate, and regularly tracking progress against your retirement goals, can move you closer to the required affluence in old age.
In short, DC savers must give their pensions plenty of attention from the first contribution to the final withdrawal. Unlike some of our elders, we cannot afford to sleepwalk to retirement knowing a guaranteed, lifelong income awaits us.
