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Steve Bee on Pensions

The Pensions Commission report highlighted the fact that we face hard choices in dealing with the consequences of an ageing population. It seems that society must choose between poorer pensioners, higher taxes, working longer and saving more.

The report acknowledges that accepting poorer pensioners is unlikely to be an attractive option and that a mix of the other three options will help to avoid comparative pensioner poverty in the years to come.

Some of the key facts were:

•Life expectancy for men aged 65 has increased from 12 years in 1950 to 19 years today. Not only that but it is projected by the Government actuary to increase to nearly 22 years by 2050. That sounds bad enough but if they have got it wrong again (something they have a bit of a track record for), then current trends could indicate it rising to nearly 28 years by 2050. So, by the middle of the century, men will be expecting to make it to 93, no bother.

•The current fertility rate in England and Wales works out at around 1.7 children per woman and is not predicted to increase much – if at all – in the foreseeable future. That is a bit awkward as we require a fertility rate of around 2.07 children for every woman to maintain the population at a steady level. This is not likely to happen so we have to accept that there will be fewer people around in the future to provide pensions for us.

•The old-age dependency ratio or the ratio of pensioners to workers is calculated as the ratio of the number of people over the age of 65 to the number of people between the ages of 18 or 20 to 64. Today, the old-age dependency ratio has fallen to the lowest it has ever been, with the number over 65 being 27 per cent of the number between 20 and 64. But it is going to rocket to a staggering 48 per cent by 2050, which will give each worker half a pensioner each to look after.

•Public expenditure on state pensions and benefits in 2002 was 6.1 per cent of GDP. However, the state was also in for another 1.5 per cent of GDP in that year to meet the unfunded pension liabilities of the public sector schemes. Or to put it another way, the generous unfunded pensions of a handful of public servants cost us about a quarter of what we pay out to all our pensioners each year through the basic state pension, Serps, S2P, the minimum income guarantee and all the other means-tested handouts. To me, that means we are either paying out too much to our public servants or not enough to pensioners in general.

That last point about the hidden costs of our pension promises to those employed by the Government was one of the things that really leapt out at me when I was reading Adair Turner&#39s report. It was pleasing to see confirmation that our voluntary private pension savings in the UK amount to £1,300bn, an enormous sum and more than all the other 24 European Union countries have between them. It was also sobering to discover that the unfunded promises to Government employees amount to a staggering £500bn. There is only one place all that cash is going to have to come from – taxes from the diminishing number of workers.

The other disappointing issue related to this is the fact that the report sets out in fairly stark terms the demise in our private sector final-salary pension schemes in the UK. These were heralded in the first of this Government&#39s pension Green Papers as being “flagship” pensions in our country and something we should not only be proud of but should encourage and nurture. It is now looking more likely that the only people who will be on a final salary promise in the future will be public servants. They, at least, are immune to the vagaries of stockmarket investing and the distortions to funding caused by the cult of annual accounting for long-term commitments.

Steve Bee is head of pensions strategy at Scottish Life

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