Mind the Gap - lost generations

Defined Benefit pensions (also known as Final Salary) were more prevalent for the Baby Boomer generation, offering predictable and hands-off retirement income much like the state pension. These pensions are run professionally by large schemes with the benefit of a large cohort spreading risks.

Mind the Gap

For Gen X these Defined Benefit (DB) pensions remained mainly for public sector roles and some large companies, marking a transition to Defined Contribution (DC) pensions. DC pensions are simply an individual investing account, shifting risk and responsibility from pension schemes to the individual, and introducing a new risk: longevity.

This leaves Gen X caught in the gap between two pension systems, and with auto-enrolment DC pensions only beginning from 2012 onwards, many Gen X were not eligible for a DB pension nor auto-enrolled in DC, leading to under-provision.

Millennium-mmmm

Millennials (except geriatric millennials like me!) were mostly covered by pension auto-enrolment, however the combination of a majority DC landscape, UK pension freedoms and the shift away from annuities as default, cements Millennials into longevity risk where they risk running out of money. Millennials are managing their pots alone, without the backup of a large pension scheme acting as an insurer across a large cohort.

Millennials have all the pension freedoms, but none of the education around how to withdraw sustainably without depleting their pot, and new n=1 individual risks.

Gen Z

Gen Z are also subject to the individual investment risks of Millennials but more comfortable with investing. Gen Z are suspicious of the state pension being available due to demographic shifts, leading to speculative investing via less-traditional and riskier investments such as crypto and trending stocks.

While Gen Z benefit fully from auto-enrolment pensions, these schemes use default funds to cater for a large number of “average” individuals to avoid litigation. Nobody is exactly average, meaning such funds are suboptimal and likely over-conservative bringing inflation risk.

Mind the other Gap

Generations lacking Defined Benefit (final salary) pensions and forced into managing their own future through Defined Contribution (DC) were never trained to handle this, there is a huge education gap and many have no idea if and when they can retire.

If you’re one of these lost generations, get coaching support and check out our Retire On Time and Retire Earlier packages!