The largest pensions scandal in history will become apparent over the next few decades, as successive governments are proven to have not taken any effective action to correct the funding crisis of state and public sector pensions. The current deficit for public sector pensions alone is £1.2trn.
These pensions have been mismanaged by governments of both of the main parties for years and years, and the extent of their liabilities has been hidden.
In contrast, just look at Norway, which has invested all its gas and oil profits for decades. As a result, a tiny country like Norway – a country with just five million inhabitants – now has a Sovereign Wealth Fund worth US$900bn. It puts the UK to shame.
Most government pensions are, of course, unfunded. When you make National Insurance contributions or public sector pension contributions, your money is not actually invested. It simply goes into the general pool of taxation out of which these pensions are paid to existing pensioners. So you are actually paying tax contributions, not pension contributions.
The current system of state and public sector pensions is no more than a giant Ponzi scheme. The biggest pensions misselling scandal in history.
The issue, quite simply, is that people are living much longer than was ever anticipated. Back in the day, a pensioner would retire at age 65 and die at age 68. These days, many people will retire and live full lives for decades after.
“The current system of state and public sector pensions is no more than a giant Ponzi scheme.”
Retired people are making up an ever increasing proportion of the UK population. The problem is that there will not be enough people working and paying taxes in the future to fund these pensions. The dependency ratio – the number of people working compared to the number retired – is increasing significantly. Indeed, it is forecast to rise from 3:1 today to 1:1 by 2050. You can see how this would make the current system totally unsustainable.
So what has the Government done to tackle it? Well, unlike the private sector, where companies have all but given up on final salary pension schemes and replaced them with money purchase ones, the powers that be have done very little apart from some tinkering with such schemes.
The next question is what should be done? Here, the Government should pay money – real money – into money purchase pension schemes and scrap public sector final salary pensions both for new and existing members once and for all. It goes without saying that existing members’ benefits accrued to date should be ringfenced and preserved, of course.
If nothing is done to work out a solution, the burden of paying your pensions will fall largely to your children and grandchildren. And that is hardly fair, is it? That said, I for one am not holding my breath that the Government will do anything of the sort.
Tony Byrne is financial planning director at Wealth And Tax Management and author of Wealth Magic