Who pays for the pension shortfall?

There is a hefty bill that needs to be paid to cover the shortfall from the past, which will have to be met by the workers of tomorrow. And of course, we know that those same workers also have to worry about saving for their own pensions, paying off education debts and struggling to get onto the property ladder.

What is an equitable balance between the state, employers and individuals in terms of saving for retirement?

The latest numbers are stark. Office for National Statistics data, published in March, show that the UK has accrued pension liabilities of £7.6tn – rights that have been built up in the past but not yet paid. 

There are assets of around £2.7tn invested to cover that bill so the shortfall is c£5tn. The biggest chunk of this is the state pension, which accounts for (currently) £4tn of the total. The other £1tn relates to commitments accrued in unfunded public sector pensions. 

It is worth considering these massive numbers in a wider context. Public sector debt is c£1.7tn at present, according to ukpublicspending.co.uk.

Total public spending is around £780bn, of which we spend c£155bn each year on pensions (about 20 per cent), which is the single largest item of public spending, marginally more than we spend on healthcare. 

Source: ukpublicspending.co.uk

Interestingly, the amount of interest we pay on our debt is equivalent to roughly one third of the amount we spend on healthcare. According to HM Revenue & Customs, total taxation receipts in 2016-17 amounted to almost £570bn, which is equivalent to about 30 per cent of GDP. That percentage has been either side of 30 per cent for the past 35 years or so.

We are told stronger economic growth will help to ease this burden. That is of course true, but there are many demands on the public purse beyond pensions, and we have a massive pile of debt to pay off in addition to the pension debt described above and the shortfall in future pensions that is building up every day.

So, what is the answer? What I do know is that we are long overdue a serious grown-up debate on this, and I can throw in some questions to kick off that discussion:

• Is 30 per cent taxation enough to repay past debts and meet current and future public spending requirements?

• If the answer is no, what is a fair and equitable way of increasing taxation?

• If we are not prepared to increase taxation, what does life look like for the population in good, average and bad future economic growth outlooks?

• What is the most appropriate future balance between all the spending demands? By this I do not mean how much can each government department persuade the chancellor to give them, I mean what value do the general public put on each component and how would the people spend the money given the choice?

• What is an equitable balance between the state, employers and individuals in terms of saving for retirement?

I am sure political parties all think about these issues, but the problem is that their answers then get bogged down in political infighting and persuading people to vote for them, rather than any collective examination of the common good. Surely these issues merit at least an attempt at putting political differences aside and seeking a long-term sustainable solution? 

Not for me, not for us, but for our children and their children.

John Walbaum is head of investment consultancy at Hymans Robertson