Pension shortfall: A post-pandemic problem we must address
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Just as we were becoming used to the cost of colossal construction projects or high-falutin’ government initiatives being quoted in billions, or hundreds of billions of pounds, the goalposts have moved.
Nowadays, it’s difficult to get a railway line built between London and Birmingham for less than £100 billion, something of a moveable feast, price-wise, because everyone knows that following inevitable delays and increases in the cost of raw materials, the eventual price will be at least 50% higher than the current forecast. Whatever happened to fixed-price contracts?
The point is, we’re increasingly likely to discover that the cost of such-and-such vanity project will be one or more trillion pounds. Given the number of years during which we gulped whenever costs were quoted in millions of pounds, it seems we didn’t spend that long in the billions and have jumped straight to the trillions.
I’m never sure which version of ‘trillion’ we’re supposed to use. Up until 1974, a trillion was written as one plus 18 noughts. Today, official statistics define a trillion as one plus 12 noughts, i.e. a million million, significantly less than the previous version. No wonder statisticians refer to the number as the ‘short scale trillion’.
Whichever version we use, it’s an almighty, almost incomprehensible figure, no doubt bandied about like confetti in some government departments; it’s certainly more widely used by statisticians as we discovered this week in a report published by the Office for National Statistics (ONS).
The report revealed that the burden to taxpayers of future state pensions, coupled with the cost of final-salary pension schemes for public sector workers, had risen by more than £1 trillion, to £6.4 trillion, in the space of three years. We should assume it’s much higher because the ONS figures cover the 36-month period to December 2018.
In many respects, the pension liability increase from £5.3 trillion has been caused by an actuarial technicality. Actuaries regularly apply a ‘discount rate’ to calculate future liabilities in today’s terms. In this instance, the discount rate has been reduced, so the future cost of pensions appears higher.
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The discount rate is directly influenced by economic activity and forecast growth. In the short term, the pace at which the economy grows is likely to be slow thanks to the pandemic, although there’s every chance of significant and sustained growth once life returns to normal. Nonetheless, the ONS figures act as a timely reminder of the UK’s future pension liabilities.
Former pensions minister Sir Steve Webb suggested three ways in which future pension liabilities could be honoured. First, we could all work for longer, an option likely to suit people who prefer to keep active following their official retirement; working an extra couple of days a week is an ideal solution for many folks.
Second, the government could raise taxes, a longer-term option which could backfire. The Chancellor must pray that the wall of money built by millions of consumers during lockdown will fall in on businesses across the land once we're allowed to emerge from our living rooms. Raising taxes on those businesses and the people working in them could stifle economic growth.
Third, the state pension could be squeezed by removing the triple lock guarantee. Introduced in 2010 by David Cameron, the triple lock guarantees to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%. The logic behind its introduction was to protect pensioners from meaningless increases in the state pension, such as the 75p a week rise in 2000 and to make sure their income was not eroded by the gradual increase in the cost of living.
Whichever option is selected, and we can probably bank on contending with a combination of all three, there’s absolutely no doubt that as the population ages, the size of future pension liabilities will grow. As a percentage of national income, the annual cost of the UK’s state pension is forecast to grow from 4.9% to 6.9% over the next 50 years.
The news will hardly come as a surprise to regular visitors to this area of the newspaper where the scale of our pension shortfall has been regularly discussed over the years. However, an acceptable solution to prevent future state pension liabilities being quoted in the tens of trillions appears as distant as ever.
THE WEEK IN NUMBERS
- 120 - A study published by the University of East London has found that the best way to spot a liar is to note how quickly they speak. Researchers asked 120 volunteers to listen to thousands of recorded phrases in order to consider their veracity and reliability and concluded that liars speak faster.
- 13lb - Following a 16-week trial, the Journal of the American College of Nutrition has found that among a group of overweight adults, those sticking to a Mediterranean diet lost no discernible weight, while those on a vegan diet lost an average of 13lb.
- £6,000 - Thanks to a disclosure of departmental spending at the Information Commissioner’s Office, we’re delighted to learn that the ICO spent £6,248.40 on chocolates bought from Hotel Chocolat just before Christmas. The payment is, apparently, subject to “an internal investigation”.
Time for a revamp?
Read Peter Sharkey’s blog exclusively at www.moneymapp.com/blog