Total UK pension liabilities increased by a massive 15 per cent over the five years to 2015, rising to £7.6 trillion from £6.6 trillion in 2010, according to the latest pension statistics from the Office for National Statistics.
The bulk of this amount (£4 trillion) relates to state pension obligations paid for out of tax, with unfunded public sector salary-related pensions (paid to teachers, nurses, civil service employees etc) accounting for £900 billion plus and a further £300 billion going mainly to funded local government pension schemes.
Steve Webb, director of policy at Royal London, highlights the disparity between pension obligations and funding. He says: ‘The numbers in this report are truly mind-boggling. Today’s population has built up £7.6 trillion in pension promises but has only set aside about a third of that amount to pay for them. The rest will have to be financed by tomorrow’s workers.
‘If we are to have a meaningful debate about how we pay for an ageing population and about fairness between generations, figures like these need to be published on a regular basis and should inform policy-making’.
Tom Selby of AJ Bell points out that the huge hole of unfunded state pension entitlements is underpinning the need for further delays to the state pension age in future decades. ‘State pension entitlements are worth more than double UK GDP,’ he says; ‘these are promises that will, ultimately, have to be paid for by future generations either through higher taxes, a lower state pension income or a later retirement age.’
Perhaps surprisingly, private sector final salary schemes liabilities still account for £2 trillion of the total, while defined contribution workplace schemes are worth only £240 billion, despite the high profile over recent years of auto-enrolment and the importance of employees boosting their pension contributions.
However, Selby observes that the defined contributions element ‘is likely to surge in the coming decades’. He says: ‘The roll out of automatic enrolment and increasing of minimum contributions to 5 per cent in April this year and 8 per cent next year will push the value of retirement pots up further.’
In addition, the ONS figures do not account the value of private investments in Sipps. These have ‘increased dramatically in recent years, particularly following the introduction of the pension freedoms in 2015,’ adds Selby.
‘This is all part of a huge social shift away from the paternalism characterised by defined benefit pensions, and towards individual responsibility for retirement outcomes through DC,’ he says.
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