At the end of 2017, a survey by the Society of Pension Professionals (SPP) found that 79% of its members felt that the UK pensions system was unfair to young people. Frankly, I wonder what the 15% of SPP members who disagreed were thinking, especially the 3% who strongly disagreed with this fairly obvious statement of fact. Perhaps they just pressed the wrong voting button accidentally…
Let’s look at the State pension first. The Office of Budget Responsibility (OBR) has forecast an increase in the cost of the State pension from 5.0% of GDP to 7.1% of GDP over the next 45 years. This forecast assumes no change to current pension policy, so includes allowance for planned rises in State Pension Age (SPA). The extra cost of £700 each year for every household in the UK seems unlikely to be affordable so my guess is that further reductions will be necessary to balance the budget. The triple lock on pension increases alone is expected to add over 1% of GDP to the cost of the State pension within 50 years. I imagine the new voters hoping for Jeremy Corbyn to be Prime Minister may be voting for more generous pensions for the current generation of retirees than they can realistically expect to get themselves.
Moving on to private sector pensions, there were 3,500 Defined Benefit (DB) schemes open to new members in 2006 but only 700 left in 2016. Over the same period, the number of employees earning DB benefits fell from 3.6 million to 1.3 million. The Institute and Faculty of Actuaries (IFOA) says that a private sector worker born in the 1960s is almost four times as likely to have a DB pension as one born in the early 80s.
The typical rule of thumb used to be that a DB scheme might cost 15% of salary, with the employer bearing two-thirds of the cost. Recent analysis shows that the surviving DB schemes are costing 22.7% on average, with only a quarter of this cost met by employees. That means that employers with DB schemes are on average paying five times as much as those with Defined Contribution (DC) schemes, where the average employer contribution rate is only 3.2% (with employees paying an average 1.0% too).
In fairness, these DC contribution rates are distorted by new Auto-Enrolment (AE) schemes and the average DC contribution from employers in 2012 was 6.6%, still only just over a third of the corresponding rate for DB schemes. Employers in AE schemes are also going to be forced to make higher contributions, with the minimum rate having increased to 2% in April and due to rise again to 3% in 2019. Meanwhile, employees will have to pay 5% contributions, meaning that they are paying more than half the cost overall, while DB members still only pay a quarter of the cost of a much higher benefit.
The Government is perfectly aware of this issue (which is much wider than pensions) and has made some efforts to address it. The policy to increase SPA as people live longer is unpopular but has been defended to date, albeit slightly weakly, and Theresa May’s manifesto admission that the triple lock would go was a massive vote loser. Several kites have been flown about intergenerational taxes but none have met with anything other than resistance. The public aren’t thinking about affordability or fairness over the coming decades and a Parliament only lasts for five years, so can we really blame the politicians for letting the unfairness drift on?