THE UK pension system was once the envy of the world.
Whereas many other nations faced the prospect of higher state spending and budget deficits as their populations aged, the UK had funded its pension schemes so that the transition from a young population to a relatively older population would be financially easy.
Alas, nobody talks about the excellence of the UK pension system any more. The funded pension schemes are still around, but many are now financially weak and borderline bankrupt.
So what went wrong and why do we have £9 trillion in pension debt and unfunded liabilities?
Our public and private pension schemes are in a mess because they are underfunded, and because the asset pool is declining while at the same time pension liabilities are growing.
Over a 36-month period state pension liabilities have increased by £1.3 trillion and it will be our children who have to the fund these liabilities – a perfect case of kicking the can down the road.
The main reason this crisis has not been tackled is because the solution is to raise taxes or to reduce state spending: no government will win an election on those promises. Voters also don’t like doom and gloom, so any party peddling the reality of the UK pensions crisis will most likely lose votes.
Another reason is public opinion: it would not look good for political parties, especially the Conservative party, if the people were to realise their pensions have not been funded even though they have paid taxes all of their lives. Imagine being 60 years old, having paid taxes for more than 40 years, and being told that successive governments have spent your pension contributions. You would surely get the hump.
The Tory party’s ‘bread and butter’ is the OAP vote and losing that support would make it impossible for the Conservatives to win power. So they will stay well away from any talk of a pension crisis.
The BBC is just an arm for the establishment so its presenters and journalists will not talk about it. Also, the same old sirs and lords who run the BBC are part of the same circle of people who have enabled the pensions crisis – so until political parties and large UK media outlets start approaching and talking more about this crisis then it will go unsolved and will grow far worse.
By 2023 UK public and private pension liabilities will break the £10 trillion mark
Recent coverage over the pension “triple lock” – the state’s promise to maintain the value of state pensions in real terms – shows us certain cracks in the system are now being exposed. The triple lock is linked to the CPI and inflation is likely to rise a lot over the next few years, which means funding pressure on pensions will increase and the state will have to find extra money to fill the void.
If the rise in CPI makes the triple lock financially unsustainable, the Conservative Party could be forced to ditch it (note 3). Current state pension expenditure stands at around £101bn a year, so for every 1% increase in the CPI the state would have to find an extra £1bn a year.
Currently US CPI has reached 5.4% and the UK will soon see its CPI break 3.5%. This means the triple lock policy will make the state pension expenditure increase by more than £1.2bn. So it is inevitable we will see cuts in spending and/or higher taxes, or an increase in the budget deficit. All are negative for the Tory party in terms of public opinion.
The government pension system and the pensions of police officers, nurses, teachers and civil servants are based on a set of promises that future taxpayers will have to honour. Tomorrow’s taxpayers will have to fund tomorrow’s pensioners. These are currently as follows:
State pension liabilities – £4.8tn
Unfunded public sector DB liabilities – £1.2tn
Funded public sector DB schemes – £490bn
Non-government pension liabilities – £2.6tn
To put this into perspective, UK pension and UK banking debt stands at around £17 trillion, which is roughly 750% of the UK GDP. This is why central banks are printing money like it is going out of fashion: they are propping up an asset bubble that is indirectly keeping both the banking and pension systems solvent.
If there were to be a market crash and a wave of defaults like we witnessed in 2008, it is without a doubt that a number of UK pension funds and banks would go bust.
Private pension debt is larger than UK public debt
I firmly believe the UK pension protection fund will collapse within the next 12 years because it is insuring way too many pensions and a default rate of less than 10% would deem the fund as ‘cashless’.
I decided to do a freedom of information request on the pension protection fund and I asked them what is the notional value of all pensions they insure? After three emails I still have not received an answer.
Mark my words, you will be hearing a lot more about the UK pension protection fund over the next seven years because it will be forced to bail out many private pensions, like it did with the BHS pensions.
Doom and gloom
Brits below the age of 40 can only conclude they will not receive the type of state pension their grandparents received. The numbers do not add up and this £9 trillion black hole will be sorely exposed once interest rates rise and quantitative easing gets tapered.
Both the government and private sector cannot fund this debt unless it were to be deflated via inflation – and that would wipe out future pensioners’ purchasing power.
This is why I regularly tell millennials and zoomers to forget about the state pension and to create their own private debt-free pension that is independent of the state and the banking system.
This fiat cash trial that we have embarked upon in the last 50 years has created a mountain of pension liabilities and it is only a matter of time until the chickens come home to roost.
