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Comment: Pension policy must be fairer and more inclusive

A recent ONS report reveals the urgent need for the government to cut costs by creating a fairer, more inclusive pensions policy

Comment: Pension policy must be fairer and more inclusive

The current pensions system is unsustainable. But that is not new. People have been pointing that out for years, particularly as life expectancy has stretched and the prospect of living to 100 is no longer an absurd fairy tale.

What is absurd is just how unstainable public pensions are. In 2015 more than £1 for every £5 collected in tax went to pensions. But it was only paying for 3p of every £1 owed.

Recently, the Office for National Statistics (ONS) released what it called ‘a fuller picture of the UK’s funded and unfunded pension obligations’. This report was filled with mind-boggling numbers such as £7.6 trillion: the total pension entitlement/liability (depending on your perspective) in the UK. That is £7,600,000,000,000. Or put another way, around 38 million Lamborghinis.

Cutting costs

Drilling into the details of the report, £4.9 trillion of pension liabilities are unfunded. These fall on the state because they are either state pension or unfunded public sector pensions.

Meanwhile, £3.1 trillion is funded through either occupational or personal pensions. So around 64% of the costs and responsibility of people’s retirement is with the state.

In 2015, the state collected £668 billion in tax, which is around 14% of pension debt. But like the rest of us, the government does not just have one bill to pay. In that year, around £150 billion was spent on pensions. So 22% of all taxes went towards pension liabilities in 2015, which funded around 3% of those liabilities.

It is clear the government needs to take a look at its spending and bring the costs down. The current situation is unsustainable and, frankly, mind-boggling. This is not the only problem. Pensions are also inherently unfair for several reasons.

The state benefit has been expanded over the decades to include more people and provide better benefit levels. It has moved away from its initial purpose of ensuring the poorest in society are not destitute in retirement. We now have a situation where a person from a wealthier background can expect to benefit most from the state because they live the longest. The gap has been estimated to be up to eight years on average.

On top of this, we have a scenario where the younger generation is funding these generous pensions for current retirees, but they are unlikely to receive the same benefit levels when they are the appropriate age. The UK operates a ‘pay as you go’ system, meaning workers of today are paying for their parents and grandparents’ pensions and in turn hoping their children will pay theirs. This is akin to a giant pyramid scheme.

Steps towards fairness

The introduction of auto-enrolment is a welcome attempt to move away from pay as you go. It is something society should embrace.

The government has also started taking steps to immediately reduce costs by increasing the state pension age, but more substantial changes are needed.

Simply increasing the state pension age does not help the poorest with the shortest life expectancies. Nor does it help the retirees of tomorrow, who are paying for the retirees of today.

Several bodies have recommended scrapping the triple lock, which ensures the state pension increases by the higher of earnings, inflation or 2.5%. This could go some way in bringing costs down and addressing intergenerational fairness.

However, removing the triple lock is politically challenging. If it is going to stick, it needs to be done through a cross-party independent commission.

There are no simple answers. But the numbers from the ONS shine a harsh light on just how much this issue needs to be tackled.

Ian Browne is a pensions expert at Old Mutual Wealth

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