14 Feb 2013

Britain’s pensions unaffordable say economists

Britain will not be able to afford to honour its commitment to pay the full pensions of public sector workers, according to a report.

Britain will not be able to afford to honour its commitment to pay the full pensions of public sector workers, according to a report (Getty)

The Intergenerational Foundation report, based on a survey of 50 economists, also raises doubts about the affordability of the basic state pension.

In the survey, 75 per cent of economists say the country’s public sector pension liabilities will not be paid in full.

On the basic state pension, 46 per cent conclude it will have to be means-tested by 2040, but 48 per cent of respondents dispute this.

‘Simply unaffordable’

Angus Hanton, co-founder of the Intergenerational Foundation, says: “These expert views demonstrate that our current pension promises are simply unaffordable.

“We must protect younger generations from our own profligacy by taking less for longer, regardless of what our generation has promised itself.”

George Magnus, senior economic adviser at UBS investment bank, says there is no prospect that the taxpayer will be able to finance the public sector pensions bill.

“The likelihood that these liabilities will be paid in full is as close to zero as statistics allow,” he says.

‘Growing unease’

But Amna Silim, an economist at the left-of-centre Institute for Public Policy Research, told Channel 4 News: “Since the 1980s, there has been growing unease about whether the state will be able to manage the rising costs associated with an ageing population and maintain fiscal credibility.

“But historical trends have shown that there has been no persistent rise in overall public spending as a share of national income over the last 40 years, despite the ageing population.”

The report says the public sector pension scheme is “unfunded” in the sense that there is not a discrete pot of money from which pensions are paid.

Instead, members’ contributions are used to pay the pensions of those who have retired.

Looking at the basic state pension, the report says the typical private sector employee, stung by low annuity rates, receives a pension of just £3,700 a year.

In contrast, 78,000 retired public sector workers have pensions of £26,000 a year.

‘Sustainable system’

The report says the government should move to a “sustainable system” of pensions provision, with a reduction in entitlements and the end of final salary schemes among the options that could be pursued.

Ms Silim said that “one area of age-related spending that is projected to fall both as a proportion of GDP and of total spending by 2061 is public service pensions”.

The government is making changes in this area. In January, it announced a shake-up of the basic state pension, with a flat-rate payment of £144 a week in today’s money, as long as national insurance has been paid for 35 years.

Pensions for public sector workers are also being reformed. The retirement age is being raised; people will have to contribute more; career average schemes will replace final salary schemes; and pensions will be aligned with the consumer prices index measure of inflation, rather than the retail prices index.

The Intergenerational Foundation campaigns for policies that protect younger people.