Richard Butcher examines the far horizon theme of the impact of financial inequality.

By Richard Butcher

In my blog “Up periscope – looking to the horizon” I explained why it’s important to look ahead to anticipate what may be coming and try to work out its impact. If we can work out the impact, we can pre-plan how to create opportunity or to mitigate risk.

There are three horizons to look to. The near horizon, which is stuff we’re aware and have a pretty good understanding of; the far horizon which is stuff we’re aware of but don’t yet fully understand; and over the horizon, which is stuff we’re not aware of but still need to be prepared for.

This blog considers a far horizon item – the impact of financial inequality.

HG Wells’ 1895 novella ‘The Time Machine’ imagined, well, in the words of the opening paragraph “a most amazing time”. The main character (and a fun fact: he is unidentified throughout the book save that he lives in Richmond) invents and rides a time machine to either end of Earth’s time. He watches the dinosaurs roam (across Richmond!) and the dying sun setting. But the main part of the story is set in the year 807,701. It shouldn’t be a surprise that man has evolved, but what is more interesting is that there has been a division into two species: the surface-dwelling, blond and beautiful Eloi, and the subterranean, caveman-like Morlocks.

In the film version it’s implied the division was caused by war, but the book takes, so some suggest, a darker path. Their theory is the book was a critique of capitalist society – Wells allegedly suggesting the Morlocks were descended from the working class and the Eloi from the upper. If that is so, there is a twist in the tale, but I’ll leave you to discover that.

It seems fantastic to think two species could evolve based around class lines – particularly now almost 130 years after the book was written, but the central premise, that two lines could emerge, because of difference of experience is perfectly valid. In fact, that’s precisely how evolution works.

Where in Wells’ mind class was the driver of this division, perhaps to our minds it would be financial. And why couldn’t this happen? The financial divide is huge and its effects pernicious.

Economic division can be measured along two axes: wealth (e.g., housing, savings, accrued pension) and income (another fun fact, some economists argue there are three axes, with income being split between “all income” and pay – but let’s ignore that for today). It’s possible to be poor along one or both axes.

I don’t want to get too bogged down in numbers but in 2020 the top 10% held 44% of wealth in the UK. The bottom 50%, just 9%. The South East was the richest with an average £387k, whereas the North East was the poorest with £165k. And the gap has been growing since the mid-1980s (although it’s a lot lower than in 1895 when the top 10% held 90%) (source: ONS).

The story is the same with income. The top 20% in 2018 had average disposable income of £69k whereas the bottom 20% had £13k (source: ONS) and again the gap is growing. Since 2008 real incomes have been flat or dropped for most people – but those at the top have seen growth.

So, what’s the impact of all this?

It’s a good question (even though I say so myself) and a full answer is beyond the scope of this blog, but let me list a few things.

The lower your wealth the lower your financial resilience. This means an increased risk of opting out of a pension scheme (structural opt outs) or reducing contributions – possibly, as a result, forgoing employer contributions and so impoverishing your future self as well. Between March and October 2020, the number of UK adults showing low financial resilience grew by 4 million! (source: FCA).

Many studies have shown the correlation between wealth and health. The richer you are the more likely you are to be healthy – probably due to improved diet, access to leisure time and facilities, and private healthcare. So, the poorer you are, the more likely you are to have poor health and a shorter life. Using geography as a proxy for wealth, this is proved by local longevity numbers: in 2020 life expectancy for a woman in the North East was 81.5 years and a man 77.6 years. In the South East the same numbers were 84.1 years and 80.6 years (source: ONS). This is, obviously, a point of inequality (particularly when it comes to state pensions) but it begs the question – what could, and should, we do in reaction?

There’s also a correlation between wealth and weight. The poorer you are the more likely you are to be overweight, with knock-on impacts on health and life expectancy. But here’s a new one: according to a recent study in the USA, overweight people in their 20s and 30s may be more likely to struggle with basic cognitive skills in later life.

Then there’s the correlation between wealth and job security. The poorer you are, the less secure your job. This means we have a growing population of members who will leave multiple uneconomic small pots of pension savings scattered about. And this is exacerbated by the “economic singularity” – the theory of an imminent collapse in the total number of jobs because of automation – because lower paid jobs are more likely to be the first to go.

So, what does all this mean?

More small pots, more vulnerable members, an increase in people drawing down at earlier ages (as happened during Covid), a growing population of members who do not get value from their pension savings because they live shorter lives than traditional models assume, and more.

What should we do?

In short, I don’t know. But having a good hard think about it seems a sensible place to start.

How ZEDRA can help

ZEDRA’s team of Pensions, Independent Trustee and Governance experts is on hand to guide Trustees and Independent Governance Committees (IGCs) through all aspects of Trusteeship and Pension Governance.

For more information, please contact