Doing it for the kids – tools to tackle intergenerational unfairness in pensions

A couple of months ago, I wrote a POV on the concerning trend that is companies turning away from their pension fund surpluses, currently being unlocked by Rachel Reeves.

If you missed that piece (credit to those who have responded to me) then don’t worry - this XPS POV is even better.

I recently read in the national press that some commentators have suggested an increase in the state pension age to 70 and a removal of the triple-lock.

But – for me at least – this doesn’t solve our problems. All of the current projections around the national budget (and we will hear more on that very soon) suggest that our national finances are creaking, and pensions is a key component.

The triple lock is often celebrated as a clever political mechanism for protecting the real value of the state pension - but the real impact is to increase the value of the state pension in real terms. When inflation is high, it ensures pensions keep pace; when inflation is low, it actually delivers real-term increases.

This should be a political decision and on paper, that sounds like a win for pensioners – but is it the right approach now? The state pension, which in the UK is an unfunded scheme, is a cornerstone of the social safety net, and was designed for a world with a classic demographic pyramid: a broad base of workers supporting a relatively small group of retirees. Today, Western societies face the opposite – a demographic inversion. That demographic shift makes the sustainability of the triple lock highly questionable.

The system fundamentally relies on current workers funding current pensioners, which in and of itself can work – but only under the right demographic conditions. In 1951, soon after the state pension was introduced, the old-age dependency ratio (pensioners per 1,000 working-age people) was around 165. By 2020, it had risen to 280, and by 2070 it’s forecast to hit 393 – nearly one pensioner for every two workers.^{1 , 2}

Changing demographics (and frankly changing economic fortunes) risks turning the state pension into a giant ponzi scheme. If we continue on this trajectory, maintaining the triple lock and current eligibility rules, National Insurance contributions will still be paid by the workforce, yet that workforce may never be entitled to receive a state pension themselves (which is unthinkable). Let that sink in.

The direction of corporate pension schemes has made this worse. Gold-plated defined benefit (DB) pensions were once the norm in the private sector. Now? Most employees are on defined contribution (DC) schemes – less generous, more volatile, and entirely dependent on market performance. And the numbers are staggering:

• Between 2011 and 2023, UK FTSE 350 companies paid over £161 billion into DB schemes just to plug historic deficits.³ That’s money that could have gone into innovation, bonuses, or, ironically, current employee pensions.
• The average DB pension pot is worth £133,000⁴, compared to just £12,600⁵ for the average DC pot.
• Less than 1 in 20 under 25s are in an active DB scheme. For those over 55, it’s six times that.⁶
• According to the Office for Budget Responsibility (OBR)'s April 2025 working paper on the UK’s overlapping generations model, the UK’s intergenerational budget imbalance is estimated at £7.6 trillion – future generations are inheriting net liabilities over five times the annual GDP.
• People aged 61–79 today are expected to withdraw over £220,000 more from the system than they contributed.⁷ The upshot of which is that today’s infants will likely need to contribute thousands more than they’ll ever receive.
• The state and public sector pension liabilities alone are £6.4 trillion — largely unfunded.

Many feel they earned their pension through hard work and years of service. The truth is: you were made a promise based on assumptions. Assumptions and economic fortunes which have changed dramatically. Now what? Future generations are left to plug the gap, and this is inherently unfair.

There are ways to address the shortfall and, ironically, the best one would be to help current and future working generations be more economically productive and help keep current pension costs constrained.

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Potential strategies for a sustainable pensions future

So how would I tackle this? Well, I have a few thoughts:

1. Scrap the triple lock and raise the retirement age
   Immediately switch off the triple lock. It’s unaffordable. Then move the retirement age to a sustainable level and index it to life expectancy. (I mean, literally no one would vote for this – but it’s a viable way to save the state pension long term.)
    
2. Use tax incentives to guide pension fund investment
   Rather than mandating investment strategies by edict, make it tax-efficient to invest in UK productive finance. Reward long-term thinking.
    

3. Incentivise insurers to back UK infrastructure
   Through regulatory capital relief, encourage insurers to invest in long-term UK assets. They’re better owners of infrastructure than private equity ever will be.

   I also think there should be an equivalent insurance premium tax on companies purchasing bulk annuity policies when the sponsor is solvent. I am sure this would raise a few eyebrows, but every scheme that doesn’t “run-on” is a double national economic hit – lost tax revenue and reduced company growth.

4. Focus on the “UK” model and not the Australian one
   Support the futures of current workers by utilising Britain’s incredible pensions industry. Collective Defined Contribution outcomes are better for members than pure Defined Contribution because you can pool longevity risk, rather than having to insure it.

   Why are we trying to copy Australia when we can do better? The Government needs to urgently create the framework for CDC schemes and leverage the Pension Protection Fund (PPF) surplus to underwrite the outcomes for these members, much like for the pure DB system before it – this way creating a framework that strengthens retirement security and promotes long-term stability.

    

We’re no longer just delaying the problem – we are actively passing it on to the next generation. If we care about fairness, sustainability, and economic resilience, we need to acknowledge that the current system isn’t fit for purpose … and honestly requires radical correction. Right now, younger generations are bearing the cost of commitments that are no longer affordable … and without a hope of a decent retirement themselves. Change is needed.