The pensions timebomb is ticking away. Recent reports estimate that private sector pensions are more than £200bn in deficit, and the shortfall in guaranteed promises to public sector workers may now be as high as £1 trillion, which is two-thirds of Britain’s entire GDP. On both counts the current position is untenable. In the private sector employers are abandoning final salary schemes, based on end-of-career earnings and years of service, and replacing them by defined contribution schemes, where contributions throughout working life are paid into a fund which is invested and the size of the pension is then determined by the value of the fund investments at the time of retirement. In the public sector, the guaranteed final salary pensions can only be paid for either by people in such schemes over the age of 50 delaying retirement or taking a cut in occupational pension income of at least 10%. if younger workers are not to be forced down into poverty to honour the guarantees given, which would act like a tax on younger generations. A fundamental re-drawing of the pensions landscape is now urgently needed. What would it look like?
There are immediate remedies which could be applied to reduce the ballooning unfunded pension liabilities in the pubic sector recently estimated at £1.1 trillion (though such valuations ae sensitive to the choice of discount rate used to convert future pension payments into today’s money). One proposal would scale back pension payouts to a maximum, including the basic State pension, to £33,000 a year (£660 a week), which compares favourably with the average private pension of £1,500-2,000 a year and the average local government pension of about £4,200 a year. However, this would no doubt be seen as too sharp a cutback on senior private mangers and Whitehall mandarins. But a slightly higher cap, perhaps £45,000 a year, should certainly be considered.
A second option would tackle the shortfall through increased revenue-raising, either through higher taxes on the richest 5% of the population (at rates of perhaps 45% on incomes over £70,000 a year, 50% over £100,000 and 60% over £250,000), or scrapping pension subsidies on which £30bn is now spent per year (and the Government has started to do this), or through a new land value tax. The real long-term answer however to unfunded pension liabilities in the public sector is clearly to introduce a contribution system as a basis for future funding.
But what is really needed in reconfiguring the pension landscape is a universal high-quality and high-value State pension scheme progressively built on top of the basic State pension. The rationale for this lies in current experience of the gross deficiencies of the private sector. These consist of the extremely poor value of private pensions which still leave the pensioner below the State income support level, the readiness (indeed eagerness) of employers to slough off their pension commitments at every economic downturn, and the vulnerability of private pensions generally to the Stock Exchange and property cycle. If you happen to retire when the stockmarket is up, you do well; and if you retire when it’s nosedived, you’re in trouble – for the rest of your retirement.
To avoid these serious pitfalls which can impoverish millions, what is needed is an updated and modernised SERPS scheme which offers a high-value second-tier pension for all, weighted according to contribution levels but at least mildly redistributive, yet allowing anyone who wishes to opt out on the basis that the alternative is at least as good as the State one. That would be fairer to women, fairer to the low-paid, protect better against inflation, and have the capacity (which only a universal State scheme can provide) to withstand economic downturns without detriment to the pensioner.