Britain's pension cloud has silver lining

But is it sustainable - or could it lead to our own downfall?

Britain has a more favourable pension position than many other European countries. How has the UK got into this position? And is it sustainable or does it contain the seeds of its own downfall?

Everywhere in Europe, populations are ageing and the so-called support ratio - the number of working-age people creating the income out of which the living standards of each retiree has to be financed - is falling. But it is not falling as fast in Britain as in many European countries. The World Bank's World Population Projections suggest that the UK will have the highest support ratio by 2025. We have a relatively small proportion of the population in the 35-49 age range.

So while there are fewer middle-aged earners to support the retired in the UK now than there are on the Continent, the balance will shift as this group comes to retirement. That is the demographic silver lining in Britain's pension cloud.

There are two other points that work to Britain's advantage. One is that its pension commitments are much lower than elsewhere. State pensions take 6.4 per cent of the UK's GDP, a smaller share than in most other countries.

Since state pensions have to be met out of annual revenues - they are not supported by a fund - the lower the level of commitments the less tax needs to be raised to pay the bill. Indexing to prices has had a large cumulative effect: real gross weekly earnings have risen 32 per cent since 1980, and the share of the basic state pension in GDP has fallen accordingly. The result is a state pension that in relative terms is less generous than it used to be, and less generous than in other European countries.

Secondly, the UK has accumulated large stock of private pension assets - over 70 per cent of GDP - out of which future pensions can be paid. The EU countries largely lack such assets. The existence of private pension schemes is one of the reasons the UK has been able to cut state pensions so much.

Since the UK scores well on all three counts, it is not surprising that it has much lower future pension commitments than most of continental Europe. IMF research suggests that average contributions of just 6.4 per cent of earnings are required to keep the UK system in actuarial balance, compared with 43 per cent in Italy*.

These differences will increase. By the middle of the next century, if present trends continue, the UK's required level of contributions will have fallen to 5 per cent of earnings over 70 per cent in Italy.

But will present trends continue? Demography can change in unexpected ways. Moreover, these extrapolations are based on the assumption of a fixed retirement age that is already breaking down in the USA, and may do so in the UK and the rest of Europe. Demographic and retirement age pressures could thus mitigate the crisis for Europe but carry no necessary threat for the UK. It would be illogical to take comfort from comparisons that depend on the basic British state pension falling further and further behind the incomes of those in work.

Flemings Investment Trust Management's 1997 "Pension Map" suggests that over a third of the UK's 24 million households would retire in financial hardship (defined as less than 40 per cent of final earnings).

If the basic pension were to be raised in line with earnings instead of prices, OECD figures show that UK public pension liabilities would be similar to those of Germany, though still well below those of France or Italy. Hence the search for alternatives schemes, such as the Government's Pension Plus, which offer to deliver higher retirement incomes at no additional cost to the taxpayer.

But do private pensions in their present form offer a viable way forward?

The UK's private pension assets have grown almost exclusively on the back of occupational pension schemes. These have roots stretching back to the 1920s and 1930s, and grew enormously from the 1950s to the 1980s as more and more employees came within their scope.

Structural changes in labour markets, in particular towards more part- time and contract work, the growth of small companies and self-employment, and the development of personal pensions have all contributed.

Personal pensions, however, do not yet constitute a complete answer. So the UK's present and prospective pension position, attractive though it may be by European standards, does not give grounds for complacency.

* Chand & Jaeger "Ageing Populations and Public Pension Schemes", December 1996

Robert Laslett, London Economics

Start your day with The Independent, sign up for daily news emails
Hillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
wimbledonScot will face Ivo Karlovic next
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test