Intergenerational differences and the future of financial services

United Kingdom

The Financial Conduct Authority (FCA) has published its Feedback Statement on last year's Discussion Paper (DP/2) on Intergenerational Differences. Intergenerational fairness is an increasingly pressing concern, with a wide disparity in financial circumstances across the generations caused by changing socio-economic conditions and exacerbated by a growing ageing population. Younger generations are struggling to find secure, well-paid jobs and affordable housing, while many of the older generation risk not having sufficient savings in later life and face the prospect of a lack of support in meeting long-term care needs.

Intergenerational differences and their impact

The key drivers of intergenerational differences are the ageing population; low interest rates; rising house prices; the changing nature of employment; and changes to student funding. Millennials face higher levels of uncertainty and insecurity compared to previous generations at a similar point in their life cycle. They have high levels of student debt and are experiencing a lack of real growth in earning potential. While there are many positives to auto-enrolment pensions, this competes with savings needs, meaning the prospect of home ownership is diminished or delayed. Meanwhile Generation X is facing simultaneous financial demands in supporting their children and their ageing parents and, for many, inadequate pensions as they fall between the gap of DB pensions and auto-enrolment. This age group has the highest level of unsecured debt (excluding student loans) of any generation. Baby Boomers, on the other hand, have largely benefitted from increasing house prices, accumulating equity in their homes, and many will have DB pension wealth.

What the FCA study does not comment on is the true cost to younger generations of our inverted age structure as successive governments fail to address shortages in social care funding and care workers. This inverted age structure will bring new and fresh challenges to younger generations. The breakdown in our social care system will come to weigh heavily on the financial lives of Generation X and in turn, Millennials. COVID-19 has thrown a spotlight on our social care crisis but there is no ready solution. With contemplated funding options including a compulsory private insurance scheme or some form of general taxation or National Insurance levy, either way future generations look set to pay. In the meantime, as the debate rages on, family support is likely to be needed to fill the gap, meaning increasing demands on time to juggle care with work and/or providing financial assistance. The population of unpaid carers in the UK is set to rise from 6.5m to 9m by 2037. These demands risk disrupted work patterns for younger generations, potential increase in indebtedness as they take on borrowing to help fund the later life needs of ageing parents and lower prospects of inheritance. One key objective for both the FCA and the industry should be enabling people to maintain their independence in later life and 'retire in place'. Studies show independent living can contribute to improved health in older age, which in turn helps to conserve wealth.

How financial services can better meet intergenerational needs

With these increasing complexities, there is a growing need for affordable and accessible financial advice. In its Feedback Statement, the FCA reflects on how changes in lifestyle are impacting changing needs in the delivery of financial advice. Consumers are no longer living linear lifecycles, where they seek product specific advice at key life stages. They are following less standardised working patterns and managing evolving and competing financial priorities. Younger generations are experiencing delayed life events when they might otherwise be prompted to seek financial advice, such as first-time property purchases, entering marriages or civil partnerships or having children.

The FCA wants the industry to look at innovative ways to enable effective consumer investment decisions and ensure financial products and services offer consumers fair value. Consumers need access to more hybrid and flexible products to help them balance short and long-term needs and help gig economy workers smooth income generation. However, this level of versatility will bring challenges in ensuring regulatory compliance of products and assessing the complexity of customer needs and the suitability of investments. These factors will in turn raise challenges in how this can be achieved on an affordable basis.

The FCA identifies access to credit as another issue. Millennials and Baby Boomers are finding it difficult to access the credit products they need either because of a lack of available credit information or volatility in consumer income and expenditure. The FCA says firms could make more effective use of existing and new data sources to support 'thin' credit files and sees digital innovation as playing an important role in this area.

The funding of long-term care is an even more complex issue and one on which the FCA largely defers to the government and its social policy. It says the industry and consumer groups would benefit from further clarity on the long-term public policy approach to funding social care. The current funding structure is poorly understood, with many only confronting its intricacies when the need for long term care arises. In a CMS study, Our future financial lives, the intergenerational impact of an ageing population, nearly a third of Generation X who foresaw long-term care needs believed the NHS would fund their care costs and almost a quarter thought their Local Authority would meet these costs. Reliance on the state for care is considered the fall-back provision for many and some argue there is little incentive to save for long-term care. But with funding shortfalls and ever tightening budgets, increasingly difficult decisions will need to be made about how available funding is spent and many may find themselves having to top up care costs. The lack of a clear government strategy on long-term social care funding stifles individual planning for later life and hampers the ability of the industry to create future-proofed long-term care products.

What next?

COVID-19 has had a dramatic impact on many people's lives. The FCA says that it is too early to interpret the long-term impact on our financial lives, but early data points to an amplification of the findings in the Feedback Statement. The FCA is using the findings from this work to inform its regulatory approach. Earlier in 2020, the FCA set medium-term business priorities that were tied to responding to many of the issues identified in the Feedback Statement. Priority areas will include enabling effective consumer investment decisions, ensuring consumer credit markets work well and making payments safe and accessible as well as delivering fair value in a digital age.

The FCA will also be using its findings to continuously monitor and re-evaluate the financial needs, circumstances and lives of different generations through future consumer and economic research. In the first phase, the FCA will be analysing intergenerational differences in the initial stages of the COVID-19 pandemic. In the longer term, analysis will feed into the future evaluation of the regulator's ageing population work.