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Think-tank: Govt single-tier state pension reforms ‘unsustainable’

National Insurance coffers are running dry meaning future generations should plan around receiving a “derisory” state pension, a think-tank has warned.

The Centre for Policy Studies, founded by Margaret Thatcher, says the National Insurance Fund – which holds National Insurance Contributions – could be exhausted by as early as next year.

This would have “symbolic significance” the CPS says in its report, confirming that the new single-tier state pension system is “unsustainable” without future retirees suffering less generous benefits and higher taxes.

The CPS says the Government Actuary Department’s recent prediction that the fund would last until 2035 is based on assumptions that are “seriously flawed”, including over-optimistic predictions of long-term earnings growth.

Report author Michael Johnson says: “Given that exhaustion is inevitable, the next generation should be advised that their state pension will be, at best, derisory.

“Indeed, it would be prudent to plan around not receiving anything at all.”

A DWP spokesman says: “Older people have worked hard and paid into the system all their lives.

“That is why our reforms are securing the long-term future of the State Pension – so it remains strong and keeps pace with increasing life expectancy.”

The CPS also calls for National Insurance Contributions to be scrapped, claiming there would be “no remaining justification” to collect the payments once the fund is exhausted.

The think-tank suggests a rise in all bands of income tax and “additional consumer taxes” could replace the lost revenue resulting from the abolition of employer and employee NICs.

“Today’s workers are passing too much to today’s pensioners, given the relative sizes of the two populations. This problem is only going to get worse, as the population ages.

“Sending the state pension age into retreat is intended to address this, but too late to save the fund”, the report concludes.


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Trevor Harrington 10th October 2014 at 1:54 pm

    A classic case of misinformation.

    It looks to me as though this Civil Servant is playing at party politics – if so he should be severely reprimanded or preferably dismissed (please note – NOT offered early retirement).

    These are the facts :-
    The state pension has been reduced not increased, by virtue of the fact that the state second pension has been amalgamated with the basic state pension. The net result is that state pensions will be a maximum of £144 per week in total, per person, whereas many would have expected total state pensions, including the state second pension, of up to £260 per week.

    The state pension has been dramatically reduced even further by virtue of the retirement age for women increasing from age 60 to 67 and for men from age 65 to 67.

    Couples approaching state retirement, who are currently in their late 50s are losing between £150,000 and £250,000 of income from their retirement years, which is impossible for them to replace – a) because of the huge figure involved and b) because it is far too late in their life to do so.

    This dramatic reduction in state pensions is financially crippling to many people, and a huge betrayal of the fundamental reason why we all pay National Insurance.

    What is particularly galling is that Civil Servants, such as the one quoted above, continue to benefit by their own utterly unaffordable final salary occupational schemes, which are virtually completely funded by the tax payer – they pay about 6% of salary into their pensions whereas we pay anything up to 30% of their salaries into their scheme for them – these employer contribution rates are treble or quadruple that of the employer in the private sector.

    Furthermore, large numbers of senior Civil Servants often take extreme advantage of their already massively generous pension, and us because we pay for it, by then seeking early retirement on spurious grounds such as an un-diagnosable bad back or “stress”, several years before normal retirement (which is already generous at age 60 anyway), an action which often costs the tax payer several hundred thousand pounds for each early retirement.

    Finally, we are told that the main reason for increasing the state retirement age is entirely due to greater life expectancy. This is of course, also absolute rubbish. If you speak to any Actuary you will find that the actual rise in life expectancy over the last 20 years is only around about 6 months.

    The stated rise in life expectancy of several years is a fiction of somebody’s imagination, largely based on healthier life styles for the few, rather than the mass obesity and substance addictions of the many.

    The fictional increase in life expectancy is largely driven by the political need to cut back on public expenditure, in order to eliminate the budget deficit and repay the national debt. Unfortunately, it does not take into account the misuse and the misappropriation of Pubic Sector pension benefits, which are now creating a completely new social divide which will make the social structure of 100 years ago look relatively appealing.

    We need a statesman to sort this situation out and soon, and I cannot for the life of me see how a politician, who is a slave to the ballot box and the Civil Service, could possibly do it.

  2. Superbly stated Trevor.

  3. This report is massively misleading. It talks about a national insurance “fund” as if there’s a pot of money sitting somewhere which is running out. In reality, contributions from taxpayers are paid straight out to pensioners and anything left over is used immediately for other things. What’s actually happening is that the amount paid in pension is set to overtake the amount taken in through NI soon, which is a very different (and far more bleak) picture. What we’re saying is that the CURRENT national insurance will not be enough to pay CURRENT pensions, which is far worse than suggesting that current taxes will not be enough to pay future pensions.

    The solutions, unfortunately, are all very difficult. You either increase taxes, decrease benefits, or increase immigration (or some combination).

    Trever, where did you get your £150k-£250k figure from? It seems rather high to me. Also, life expectancy has increased by many more years than 0.5 in the last 20 (speaking as an actuary!). The big problem is actually that healthy life expectancy (i.e. the number of years you are expected to live disability-free) hasn’t really increased at all. So we’re all living longer, but not getting any more years of fun, it’s just more years of being kept alive as medical advances are made to allow unhealthy people to live longer.

  4. Trevor Harrington 10th October 2014 at 8:12 pm

    Evening Chris,

    The maths:-
    Until a year or so ago, most people who had full state second pension entitlement, both men and women, would have expected a state pension of circa £260 per week – from age 60 for women and 65 for men. Some, who have recently retired, are now in receipt of such state pensions.
    Future retirements are now only going to receive £144 per week from age 67.
    That is a loss of £260 per week for 7 years for women = £94,640.
    That is a loss of £260 per week for 2 years for men = £27,040.
    That is a loss of £260 – £144 = £116 p/week loss for Women to say age 85 from age 67 = – £108,576.
    That is a loss of £260 – £144 = £116 p/week loss for men to say age 81 from age 67 = – £84,448.

    You are quite right … my original estimate of pension loss was based on general figures, assuming that not everyone would achieve full state second pension entitlement, so I estimated a real income loss of between £150,000 and £250,000. The actual loss to many people, who previously expected a full state basic pension as well as a full state second pension could easily be as high as – £314,704 during the couple’s lifetime.

    Of course, none of these figures account for inflation (indexation), which would make the numbers even worse.

    Turning to the question of life expectancy, I would hesitate, as you say you are an actuary. However, I think I am right in saying that the actual, real, “current day” life expectancy is not much different to that of twenty years ago, certainly by no more than a few months. However, I think where you may be confused (forgive me) is concerning the additional calculations that are added to real current day actuarial life expectancy rates where thy have added certain additional factors (not proven by real time events) on the presumption that these additional factors become facts – thus extending the actuarial life expectancy to something which is now based on presumption.

    Of course, if you are going to add in enhancing factors which increase presumed life expectancy, you must also add in the proper and real negative factors such as obesity and recreational drug misuse … the beef burger factor, if you will.

    Some people will undoubtedly live longer … many will die considerably younger than they did twenty years ago.

    I will drag you back to the reality of the issue :-
    The Labour Government of 1997 – 2008 taxed and spent our economy into oblivion. As a direct and specific result, the current Government has been obliged to try and balance the books by removing £150,000 to £350,000 (corrected as above) from each and every couple in this country, who are yet to come through to retirement.

    As I have said before, we desperately need a statesman, the like of which has probably never been seen before in this country, who will tell the public the truth, without any tinge of political correctness, and then move on the hugely divisive disparity between the current benefits awarded to the public sector, as compared to private sector – political suicide you may well say.

    A client of mine who hails form a much more distant generation, assures me that the way by which such problems were resolved in the past was by World War – let us sincerely hope we can find the statesman before then.

  5. Thanks Trevor.

    I’ll refer you to some recent ONS figures:

    The tables in these figures will show you the extent of the improvement in both life expectancy (projected death rates) and actual age of death through time. Figure 1 on page 4 shows that in the last 20 years these measures have increased by about 8 years for males and around 6 years for females. And that’s certainly the trends I’m seeing in my work.

    Also, I would be interested to know where your £260 figure comes from, I think this is the main place where my projections and yours diverge. When I was reading over the proposals for the flat rate pension, it looked fairly balance sheet neutral to me i.e. there were winners and losers, but overall the amount being spent on pensions wasn’t changing much.

    The figures I’ve used in my own projections come from the following two sites:

    The first shows the average state pension received is around £120 per week, and the second shows that the average S2P/SERPS on top is around £20 excluding income from contracted out pensions. This would tie up with the fact that the flat rate of around £140 should be broadly revenue neutral. However, I agree that the years lost as the retirement age moves up will definitely constitute a loss for individuals, but I’m not sure it’s anywhere near as high as even your lower estimate of £150k.

    However, even if your figures are correct rather than mine, I don’t think there’s much that can be done. Pensions are rapidly becoming unaffordable and unfortunately someone has to lose out heavily. It’s either going to be current or future pensioners, but someone definitely is going to get hit hard. I’m personally making my retirement plans assuming I get no state pension whatsoever, and I would encourage anyone under the age of around 45 to do the same.

  6. As Trevor says world wars or an increase in extreme sports in later life. Alternatively make all politicians who vote for a war have to fight themselves.

  7. Trevor Harrington 13th October 2014 at 3:39 pm

    Good afternoon Chris,

    I am very sorry Chris, but your statistics do not back up your assertions.

    Thank you for providing the ONS statistical analysis of life expectancy in this Country. It is good to have my suspicions fully confirmed, although I suspect that you are now going to argue with that. I would recommend everybody to have a read through the ONS figures which you have kindly provided, in order to satisfy the question of life expectancy for themselves.

    What is particularly interesting is that these statistical figures can be read in a number of ways, depending on what one is trying to prove. I was surprised to see that life expectancy can in fact be defined in three different ways – “Expectancy” – “Median” – or “Modal”. Perhaps we should refer to that old adage about lies, damned lies, and statistics.

    Never the less, for those of us who are not prepared to read or question the validity of such such statistical obfuscation, I can summarise the ONS Stats (which I have studied) with the following accurate and considered professional conclusion.
    – There is indeed virtually no change in life expectancy in this country UNLESS you try to compare one type of statistic (expectancy – median or modal) with another, or UNLESS you want to go back to include figures for the turn of the last century –
    – Furthermore, if you do want to insert some hypothetical calculations, there are an awful lot of obese people in this country who are about to bring the figures down substantially (you do not see obese people in their 80s) –

    For my part, my instinct rewards me well. I can remember Actuaries saying to me in the 1980’s, when I started in this profession, that the average age at death was approx 81 for men and 84 for women. My instincts are confirmed in as much that the ONS stats which you have provided confirm that in 2010 it is now 82 for men and 85 for women (there is no provision for part years in the stats).

    Back to the subject in hand – If the arbitrary loss of 7 years of state pension for women and two years state pension for men, was due to the increased average age at death, we would now be looking at ONS stats saying that the average age at death would be 84 for men and 92 for women – preposterous tosh.

    In which case, I would contend that there must be some other reason for the Government removing such vast amounts of public spending by cutting our state pensions in this way. I would look no further than the national budget deficit and the national debt – why else would they do it? – and who created the debt in the first place? – and if they are not spending it on our pensions, whose pensions are they spending it on?

    Turning to public sector pensions – If our politicians insist on taking every opportunity to electioneer by constantly declaring that all public servants are paragons of honesty and hard work, when we all know that is a very long way from the truth, and that often it is only the front line troops who are generally so (not exclusively so by any means), then those public servants will secure for themselves better and better terms and conditions, including hugely expensive and unaffordable pensions – which is what they do indeed have.

    It is a subject which is beginning to get some managerial attention in as much that many public sector employees are now qualifying for occupational pensions from age 65, but they still have their pensions earned to date which are fully index linked and available at age 60, or earlier for spurious and fraudulent early retirements. In the meantime, the wealth creators of the Country, the private sector, has always had to go to age 65 for men (60 for women) and now to age 67 or 68 for all of us.

    Turning to the question of state pension benefits which are currently in payment, all I can say to you is that, very much in common with many other Advisers, I have large numbers of clients who are in receipt of individual state pension benefits well in excess of £200 per week, many of them over £250 per week, and then attendance allowances etc on top of that – and quite rightly so.

    Interestingly, some of these clients are Widows in their 80s, and in many cases their husbands died a long time ago.

    Personally, I always explain to clients that men die well before women because of the way we look after them … either that, or it is because we want to.

    In short, the huge disparity in pension benefits between the public and private sector needs to be attended to. Perhaps it is beginning to be so.

  8. Which part of the ONS report I linked backs up anything that you have said about life expectancy? Can you quote me a passage which shows that life expectancy isn’t going up by much? The very second sentence in the report says:

    “Over the last 50 years (1960-2010) the average life span has increased by around 10 years for a
    man and 8 years for a woman.”

    The report uses several different measures of life expectancy, and all of them have increased enormously over the years. So your point of “There is indeed virtually no change in life expectancy in this country UNLESS you try to compare one type of statistic (expectancy – median or modal) with another” is just plain wrong. If you want to try to convince me that life expectancies are not increasing, I’d need to see proof of that from a cited source, my source is pretty clear that they are.

    Whether this will drop in future is another matter. You’re correct in that higher levels of obesity is likely to cause more deaths than in the past, but by the same token there are forces moving in the other direction. Far fewer young people smoke than was the norm in the past, and this translates into much lower instances of cancers and cardiovascular problems. Medicine constantly improves as does our ability to catch diseases earlier. Which of the opposing forces will win (i.e. whether life expectancy will continue to increase, or whether it will reverse) is not all that clear, but the current best assumptions available all point to continuing increases.

    And, on the state pension, I’m glad to see that you haven’t questioned my figures. I have absolutely no doubt that there are people out there on a state pension of £250 a week, but those are the exception, the outliers, not the norm. The norm are the figures which I quoted, the average figures received. And as such, it’s not a reduction in benefit of £150k-£250k for every pensioner, it’s much less than that on average, even though some individuals may see reductions this high.

    This is quite far from the main points now, but I wanted to clarify that nothing I’ve said is incorrect.

  9. Trevor Harrington 13th October 2014 at 5:48 pm

    Evening Chris,

    Perhaps we will have to agree to disagree.

    It illustrates perfectly that statistics can be read in a number of different ways, and are therefore highly dangerous. I am certainly not suggesting that you are “incorrect” as such, but I might venture that you are being misled by a quite misleading document.

    However, whilst the report does make the entirely misleading statement to which you refer, at the beginning, I think this might be intended to encourage the reader to read more deeply. If you do so, you will see that it also goes on to refer to “Life Expectancy” being 79 for Males and 83 for females in 2010, or the “Median age for death” being 82 for males and 85 for females in 2010.

    I have always used the “median age” as the more appropriate figure, especially when referring to the number of years an individual might be expected to draw his or her pension. But, In any event, “median” or “average”, the statistics for both are entirely compatible with those which we used in the 1980s which were age 81 and 84 – in short there is little or no change – or indeed one could read it as saying that longevity is actually reducing.

    Even the “modal” stats do not substantiate taking 7 years state pension off a female and then only two years off a male – there is no logic in that at all – and even if there was, the report itself refers to a “smoothing exercise” in the “modials” which has removed deaths by war and epidemic – amongst other reasons – why? – no idea.

    Whatever we think about life expectancy, probably becomes a bit irrelevant, It still does not justify removing peoples state pensions, and we are still left with the huge and unaffordable discrepancy between public sector pensions, employee benefits, and hours of work , when compared to the private sector.

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