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Public sector pensions are seen as a threat to the sustainability of our public finances. They’re also a potential cause of conflict between the public sector workers who benefit from them and the private sector workers who pay for them.

However, the most expensive public sector pension scheme of the lot is the one we all benefit from – the basic state pension. Writing in Standpoint, William Norton has some frightening figures for us: 

  • "The largest financial hole facing the UK is not the deficit (£126 billion and sticky)… Nor is it the national debt (£1,039 billion and rising)… the grimmest spectre haunting us is the liability attached to the state pension system. Depending on whom you ask, this is equivalent to possibly £2,000 billion, a figure nowhere incorporated in the public accounts." 

The entire liability is, of course, unfunded. What Norton calls the "state dole-pension’ is paid out from current revenues. For various familiar demographic and actuarial reasons, the burden on the budget is getting heavier all the time.

However, future burdens could be significantly reduced if we all had individual pension pots funded decades in advance with a one-off lump sum from the state (and which we could top-up with our own savings): 

  • "One-off lump sums to a few hundred thousand people born in the same year would cost far less than weekly dole to several million pensioners for as long as they live. Increased tax relief and exemptions would be only a fraction of a fraction, and would be offset by reduced administration costs and the wider benefit of higher levels of saving and investment. 
  • "…if we had this sort of state pension system, by about 2040 (when I will be collecting my pension) it would save the state at least £100 billion. Which is quite a nice little windfall for our children, don't you think?" 

The obvious problem is that, while this could work for the young, the existing state pension system still has to be funded for everyone else. Mr Norton, though, foresees a solution. Accumulation based pensions would produce big savings several decades hence, therefore "what is needed is a way to get our hands on all that lovely future money so that we can spend it now."

His modest proposal is that the Bank of England should print vouchers, to be redeemed at some future point from savings produced by the new pensions system, but which would be used in the present to fund the transition from the current pensions system.

He provides a lot more detail, but readily admits that his scheme boils down to a form of quantitative easing (QE). As with QE at the moment, the Bank of England would essentially be printing money with which to purchase financial assets (only, in this case, to go into our pension pots)

But wouldn’t this add to the liabilities on the nation’s already over-burdened balance sheet? No, because the nation is already liable for the pensions it has promised to its working-age citizens when they retire. This is not a liability that formally appears on the national accounts, but it is there nonetheless. Norton’s proposal is essentially a means of waking up to this reality – and focusing the decisions we make on our responsibilities to the future: 

  • "Through the vouchers an open-ended, unfunded and unquantified liability would be changed into something that is capped in real terms, hard and marketable and used to fund personal pensions for everyone. To that extent, the financial engineering involved could be called Qualitative Crystallisation." 

Crazy stuff, maybe – but not half so mad as our current arrangements.

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