Britain's pension cloud has silver lining
But is it sustainable - or could it lead to our own downfall?
Tuesday 01 April 1997
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
Diving in at the deep end is no excuse for shirking the style stakes
- 2 Why I'm on the brink of burning my Israeli passport
- 4 L'Oreal cuts ties with Belgium supporter Axelle Despiegelaere after hunting trip photographs
- 5 War is war: Why I stand with Israel
Ian Thorpe gay: Olympic swimmer comes out in Parkinson interview
Gaza-Israel conflict: Pro-Palestinian demonstrators take to streets of London, Paris and New York in wave of protests
Israel-Gaza conflict: ‘Sderot cinema’ image shows Israelis with popcorn and chairs 'cheering as missiles strike Palestinian targets'
Israel-Gaza conflict: Israeli air strike destroys home for the disabled killing two women residents
Israel-Gaza conflict: Israeli PM says conflict may 'continue for a long time' as hundreds of Palestinians flee their homes
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Australia facing international condemnation after turning around Sri Lankans at sea
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
iJobs Money & Business
£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...
£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...
£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...