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

News
A Brazilian wandering spider
news

World's most lethal spider found under a bunch of bananas

News
people
Arts and Entertainment
Tim Wonnacott dancing the pasadoble
TVStrictly Come Dancing The Result
Sport
Mario Balotelli pictured in the win over QPR
footballInternet reacts to miss shocker for Liverpool striker
PROMOTED VIDEO
Voices
Sol Campbell near his home in Chelsea
voices
News
<p>Jonathan Ross</p>
<p>Jonathan Ross (or Wossy, as he’s affectionately known) has been on television and radio for an extraordinarily long time, working on a seat in the pantheon of British presenters. Hosting Friday Night with Jonathan Ross for nine years, Ross has been in everything from the video game Fable to Phineas and Ferb. So it’s probably not so surprising that Ross studied at Southampton College of Art (since rebranded Southampton Solent), a university known nowadays for its media production courses.</p>
<p>However, after leaving Solent, Ross studied History at the School of Slavonic and East European Studies, now part of the UCL, a move that was somewhat out of keeping with the rest of his career. Ross was made a fellow of the school in 2006 in recognition of his services to broadcasting.</p>
TV

Rumours that the star wants to move on to pastures new

News
Kimi the fox cub
newsBurberry under fire from animal rights group - and their star, Kimi
Arts and Entertainment
filmsIt's nearly a wrap on Star Wars: Episode 7, producer reveals
Life and Style
fashion
Arts and Entertainment
Russell Brand labelled 'left-wing commie scum' by Fox News
TV
News
ebooksAn unforgettable anthology of contemporary reportage
News
Paul Nuttall, left, is seen as one of Ukip's key weapons in selling the party to the North of England
i100
Arts and Entertainment
BBC's Antiques Roadshow uncovers a TIE fighter pilot helmet from the 1977 Star Wars film, valuing it at £50,000
TV

TV presenter Fiona Bruce seemed a bit startled by the find during the filming of Antiques Roadshow

News
people

Comedian says he 'never laughed as hard as I have writing with Rik'

News
i100
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

IT Operations Manager - London - £55,000

£50000 - £55000 per annum + bonus + benefits: Ashdown Group: IT Relationship M...

Banking Solicitor NQ+

Highly Attractive Salary : Austen Lloyd: NOTTINGHAM - BRILLIANT FIRM - You wil...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past