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Polarised pensions

Everything is relative when it comes to money I guess and in everyday life when we are buying books or going out on a Friday night we pretty much know what’s what on the money front.

It’s not the same, though, once we get to thinking about numbers with loads of noughts on the end. For some reason the higher the amount of money, the harder it is to understand what you’re looking at.

We did go out for a meal last Friday night and got to talking about the fact that bailing out a bank meant the Government had to put up £24bn. That’s £24,000,000,000. My friends said they didn’t really have any feel for what £24bn amounted to in the overall scheme of things. Perhaps it’s cheap? Who knows?

I have been thinking about that ever since really. It seems to me that the 29 million people in the UK workforce could theoretically put £29m on a table by chipping in £1 each. A billion pounds is a thousand million pounds. So if 29 million people wanted to put £24bn on the table we would all have to put in £827. That puts numbers around the £24bn mark into perspective for me, it represents around £827 for each person at work.

That got me thinking about the £1,600bn the UK has put aside in funded pension savings for private sector pensions and individual personal pensions. That is a lot of money. If £24bn is £827 for each of the 29 million people in the workforce, then £240bn is 10 times that, or £8,270 for each worker. But £240bn is a little over one-sixth of the money we have in funded pension assets. Our pension savings of £1,600bn are therefore equivalent to just over £55,000 for each person in the workforce of 29 million.

But these funded assets are not owned by everyone in the workforce. They are owned by about a third of them and that is what our pension crisis is all about. If our pension assets were owned equally by all of us, then we would probably not be in too bad shape. But they are not and that is why we are heading for a polarised retired society some time in the near future.

The Government doesn’t have to put aside funds for the pensions that it promises to its own employees. Different rules apply to the public sector for some reason. If the Government did have to put aside funds, it seems likely that the amount would need to be something like £960bn (or £960,000,000,000 to put all the frightening noughts in a line to underline the seriousness of it all.

To read the debates in Hansard about all this, you could be forgiven for thinking that it is not real money that is being talked about when public sector pensions are being discussed but it is. The money will one day have to be paid in taxes by those in the workforce and their employers. The figure of £960bn is equivalent to £33,000 for each member of the current workforce.

Those who own a share of the funded pension assets are doing OK, as are those who work for the Government and who are pledged equally valuable assets from the tax system. The people who either do not work for the Government or who do not own any of the £1,600bn pension assets – around about half of the current working population – are really depending on the Government getting this current round of pension reforms right. And if that hasn’t got “ooh-err” written all over it I don’t know what has.

Steve Bee is head of pensions strategy at Scottish Life


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