Tentative Steps…

• The last fortnight has seen some important pension-related announcements about a flat rate state pension for everyone and the recommendations on managing public sector liabilities made by the Hutton Report. Hot on the heels of these follows today’s Budget.
• Many will be watching to see how George Osborne walks the tightrope between growth and fiscal discipline, whilst others will be worrying about the Government’s responses to the latest round of inflation numbers. These are transiently important – the far greater macroeconomic implications lie in his response to the longer-term crisis in pensions unfolding just past our myopic horizon.
• With the incoming wave of baby boomer retirees and government spending projected to increase by 2¼% of GDP due to demographic changes between 2019 and 2029, the key question will be whether fiscal discipline is brought to bear to make pensions sustainable. Deficit financing is not an option.
• While tackling youth unemployment is key to rebuilding the long-term savings for 18-24 year olds, we shouldn’t forget those at the other end of the generational scale either. There are complex ramifications for how our society is structured going forward, in areas such as age discrimination, future legislation and retraining of older workers.
• And let’s not forget the private sector in the aftermath of the Hutton report either. The lack of action there will only perpetuate the pensions inequity between public and private, not to mention the resulting societal envy and anger. 

The last two weeks have seen two events of potentially profound importance to the pensions landscape in the UK. First, Iain Duncan Smith announced that the state pension would become a flat rate of £140 for everyone and then a few days later, Lord Hutton unveiled a series of innovative recommendations for managing the rapidly growing liabilities of public sector pensions. 

Today sees George Osborne’s first full budget as Chancellor. Many will be watching to see how he walks the tightrope between growth and fiscal discipline, whilst others will be worrying about the Government’s responses to the latest round of inflation numbers. 

Whilst these are transiently important, I will be watching for something very different – his response to the longer-term crisis in pensions unfolding just past our myopic horizon. I want to see if he can build on the last fortnight and deliver a budget focused on simplification and on beginning the slow process of reforming a broken system. What is key ultimately to the entire pensions crisis is a coherent strategy to create a credible and sustainable pension system for future generations of pensioners across all income groups and sectors – public and private. 

Recent and well-telegraphed noises, such as the indications of a rise in the personal allowance, are encouraging. Coupled with the planned reforms to the state pension allowance, they should go a long way towards providing a more efficient and equitable pension system by removing more pensioners from the tax net and providing significant cost savings. 

The key question will be whether these are accompanied by measures to make pensions sustainable. Here, the long-term sustainability of the public finances is important and it is important that a focus on cutting deficits is maintained. Government spending is projected to increase by 2¼% of GDP due to demographic changes between 2019 and 2029. By mid century, age-related government spending on education, pensions and health is projected to be around 27% of GDP and perhaps more if state pension spending rises in line with that projected in many other EU countries – a strong possibility given the decline in occupational pensions and other forms of long-term saving. 

Future governments cannot finance this additional spending by dipping further into the deficit in the longer term. For the next decade, successive waves of the large baby boom cohort will leave the labour market and starts relying more on government help in the shape of pensions, healthcare and long-term care. Given the unsustainable debt burden this will impose on the economy in the absence of action, it is clear that a disciplined approach is needed if we are to deal with the financial consequences of an ageing population.

Equally, there is talk of extra money for apprenticeships and vocational skills programmes. That will be important in the aftermath of the recent crisis – many 18-24 year olds now have broken employment records and will begin saving later (and likely less) for their retirement. Therefore, more needs to be done to tackle youth unemployment. 

However, we shouldn’t forget those at the other end of the generational scale. Older workers near retirement were also disproportionately affected and increasing numbers of pensioners are working past their retirement date already – over 12% compared to just 8% a decade ago, and at least in part due to an inadequate retirement pot. Coupled with the planned rises in the retirement age, there is a need to focus policy on retraining and investing in human capital across the demographic spectrum to give older people an adequate choice of alternative careers. This will be particularly important in professions that require manual expertise such as construction, where age will be an insurmountable barrier. There will be additional complex ramifications for how our society is structured going forward in areas such as age discrimination and future age-related legislation. 

Then, there are the potential announcements in the aftermath of the Hutton report. There are many who have not liked his policy recommendations, but if an increase in employee contribution rates can help to salvage public sector DB occupational pensions from being scrapped, then surely this ought to be a price worth paying. Equally, public sector workers ought to accept that their retirement age will have to go up as longevity increases, and probably not only for new joiners. 

However, when outlining his reforms, the Chancellor should not forget those in the private sector. This is an opportunity not to be missed – despite the best efforts of previous incumbents – given the even bigger challenge arising from the (dire) state of occupational pensions in the private sector. After all, what will be considered adequate for the public sector should also be adequate for the private sector – how otherwise could it ever be perceived to be fair? 

Tentative steps perhaps but if realised, they represent the start of a much needed journey.