The UK's total unfunded pension obligations = 321% of GDP

The new supplementary table published by ONS in Levy (2012)10 includes the following headline figures for Government pension obligations as at end December 2010:

· Social security pension schemes (i.e. unfunded state pension scheme obligations): £3.843 trillion, being 263 per cent of gross domestic product (GDP) (£3.497 trillion at end of December 2009)

· Centrally – administered unfunded pension schemes for public sector employees (i.e. unfunded public service pension scheme obligations): £852 billion, being 58 per cent of GDP (£915 billion at end of December 2009)

·  Funded DB pension schemes for which government is responsible: £313 billion, being 21 per cent of GDP (£332 billion at end of December 2009).

In summary, the estimates in the new supplementary table indicate a total Government pension obligation, at the end of December 2010, of £5.01 trillion, or 342 per cent of GDP, of which around £4.7 trillion relates to unfunded obligations.

Or visually:

Source: ONS

Comments

[James]

I am interested in, but do not pretend to understand economics but maybe the phrase, something's got to give springs to mind.

Are these new trillions of government debt that have slipped under the radar?

[prohyp]

Frightening!

I'm grateful that now I'm in my 80's I hopefully don't have too many years to go before the I will cease to draw that to which I have continuously subscribed since the age of 15. It is apparent that like so many other government schemes the monies collected for the pension of pensions has been used for other purposes.

[Andyinfo]

Thanks Terry for aggregating this and making it so easy to understand. The Endgame lurks in the not too distant future, these levels of unfunded debt cannot be covered, its impossible.

I was chatting with a 'Financial Advisor' about a year ago trying to extract MY money from a locked in LG pension scheme and his comment (he would say that wouldn't he) was that ALL of the indebtedness was 'priced in'..That level of self deceit is hard to deal with.

[dezzie]

Have public pension liabilities ever been 'funded' by accrued, annuity producing capital assets? Are they not paid from 'current account' expenditure?

[Diane]

Bloody hell, what's to be done!?

[Terry Smith]

Andyinfo: the level of self deceit is indeed truly breathtaking.

[Terry Smith]

Dezzie: I am not aware that they have ever been funded and the fact that they aren’t is not the point I am seeking to make, although funding would help to prevent governments making promises which fall to others to fulfil in the future, it is that their size if pretty alarming in comparison with the current income. I know they are payable from future income but I wonder what GDP growth assumption would be required to make them fundable from revenue.

[ernie]

I suppose the only slight consolation is that pension obligations are (afaik) payable on a longish time scale, but as you say where is the growth to improve the sums going to come from? Re the financial advice thing - it's pretty obvious now that saving for a private pension is a waste of time unless you are either (a) under 30 and/or (b) in a very high-paid job. This of course has encouraged ridiculous over-speculation (especially in houses) and such speculation has been deliberately encouraged by the authorities. It continues to be. I expect the outcome to be an economic slump the effects of which will be difficult for any of us to escape from.

[Terry Smith]

Diane: Admit the truth: these liabilities cannot be paid other than with Monopoly money.

[Dezzie]

Terry,

Of course you are right but who in government has any interest ot incentive to tackle a problem that would ask public bodies and public employees to contribute to something for many , many years in order for those employees get the pensions to which they are already feel entitled?

And who can be trusted with the money?

[Terry Smith]

Ernie: I would not take too much comfort about the pension liabilities falling due over a long time scale. For one thing, estimates of longevity have proven woefully inaccurate so the liabilities may be larger and persist longer than the estimates suggest. I agree with you about the speculation in housing and a likely slump which I suspect we are already in, but it’s never too late to start saving in my view.

[Terry Smith]

Dezzie: No one in government or most of politics seems to have any incentive to tackle the problem as they do not see their task as maintaining or improving the situation of the country and its citizens. They see their task as obtaining and holding onto office. Who can be trusted with the money? Not most of the conventional fund management industry, but John Bogle at Vanguard seems to run some good, cheap index funds, and other countries such as Abu Dhabi, Norway and Singapore have large sovereign wealth funds which seem quite well run so people can be found to run the money well.

[David Lilley]

It is really quite a bit worse than this but "our servants" (the current government) are tackling the problem on all fronts. And additionally tackling a second mushrooming future cost, the care bill.

When the state pension was introduced the average duration of the pension was 18 months. But despite our living longer the pension age wasn't changed and is still 65 for men, 60 for women and 60 for the one in five in the public sector. It is now due to change.

We did have a GDP of £1.5t in 2007 but it is only £1.3t today.

One of the presentationally best TV programmes on the "debt crisis" was by a film director and he worked on our sovereign debt being 400% of GDP whilst officially some 78% at the time (2009). He worked on 400% because he included PPI of £300b and pensions liabilities as great as you mention above.

Whilst the sovereign pensions liabilities are spread over decades and therefore not current debt, it is also true to say that their net present value is the numbers you have stated. We would have to put this amount of money aside today in a growing investment to cover these liabilities as they will grow with inflation and children today can expect to become centurians.

In the programme I refer to Brendan Barber and a Labour cabinate minister didn't know the difference between deficit and national debt.

Another pertinent fact. A private sector worker would have to put 35% of his income into pension all his working life to equal the pension provision of a public sector worker on the same pay (supplied by Policy Exchange). And of course the public sector worker currently gets 8% higher pay than the private sector worker and despite their pay freeze many have received "seniority" pay rises of 9% over the last two years, ie. you get a year older and get a rise despite the pay freeze.

[Ken Charman]

This is not just a government debt problem it is an issue that directly impacts individuals. Life expectancy goes up by approximately 3 months per annum - yet middle class society still expects to retire at 65 or younger with the balance of their ever extending lives being funded by the same number of years of pension savings. There is no meaningful public debate on this.

I work with Tom Kirkwood who gave the Reith lectures on Ageing in 2001 which highlighted the issue. Since then we have collectively rammed our heads in the sand.

My personal view is that a single retirement age of 67 or any other number is too blunt an instrument... especially as we can do a pretty good MOT at age 60 to divide the population into cohorts by their expected life expectancy (10 more years, 20 more years, 30 more years). Shouldn't we be debating this in relation to how we set annuities, tax incentives for saving, calculating personalised retirement age, creating late stage careers (where people like teachers for example can continue to work and contribute to pensions schemes in employment that matches their physical and mental capacity. And, we need to renegotiate those public sector pensions. They were calculated on a false premise. The beneficiaries entered into a contract which guaranteed benefits that we now know were based on false calculations. The other party to this contract is the taxpayer who is entitled to some consideration. For example university lecturers now live twice as long after retirments as long as they did when their scheme was set up - yet they are retiring younger and contributing less.

It seems that the daftest course available is being pursued - which is to nudge up the standard age for the state pension when the numbers seem about to collapse.

So.. it's not just a funding gap - it's a chasm of ignorance and denial...!

[Cornish]

Interesting and worrying statistics but does anyone know how this set of figures compare with the same criteria of five and ten years ago.

The trend could have improved or got worse. Without comparison you can't tell.

[PENSION SCHEME]

Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.

[James]

It really is a frightening thought and your graph does visually highlight the point rather well. The authorities have started to deal with the issue but it will take a generation of dealing to get to grips with the problem.