UK pension liabilities surge by £1trn in five years

UK pension liabilities surge by £1trn in five years

The total liability of the UK pension system increased by £1 trillion in five years to £7.6 trillion at the end of 2015, figures from the Office for National Statistics (ONS) show.

However, only a third of the total is currently funded, which means the "rest will have to be financed by tomorrow's workers," warned Sir Steve Webb, director of policy at Royal London and former pensions minister.

The bulk of the £7.6 trillion liabilities are made up of government pensions which, with a total of £5.3 trillion, are almost all unfunded.

The state pension bill was at £4 trillion at the end of 2015, with the unfunded public sector schemes being responsible for another £0.9 trillion.

The only liabilities that are currently funded are the Local Government Pension Scheme, with £0.3 trillion.

The occupational pension sector had liabilities of £2.3 trillion at the end of 2015, up from £1.6 trillion in 2010, the ONS figures show.

This total is made up of £2 trillion funded defined benefit schemes, £0.1 trillion in annuities and £0.2 trillion in trust-based defined contribution plans.

Individual pension plans, not included in the grand total of liabilities, account for almost £0.5 trillion.

Sir Steve said: "If we are to have a meaningful debate about how we pay for an ageing population and about fairness between generations, figures like these need to be published on a regular basis and should inform policy-making."

Alistair McQueen, head of savings and retirement at Aviva, explained for unfunded pensions, "the thinking is that workers today pay for today's retirees on the understanding that our own retirement tomorrow will be funded by tomorrow's workers."

He said: "Demographics suggest that accepting this deal in the future will become increasingly tough. Today, there are more than three people of working age for every one of pension age.

"Over the next century, this will fall to just two people of working age for every one of pension age. On the surface, this may seem like a small shift. But it equates to a 50 per cent increase in the weight being carried by each worker."

Tom Selby, senior analyst at AJ Bell, said the figures published by the ONS were astonishing and bring into sharp relief the reasons behind proposed increases in the state pension age.

He said: "Unfunded state pension entitlements are worth more than double UK GDP – these are promises that will, ultimately, have to be paid for by future generations either through higher taxes, a lower state pension income or a later retirement age."

According to Nathan Long, senior pensions analyst at Hargreaves Lansdown, the fact unfunded pension promises from the state and some public-sector schemes account for such a vast proportion of pension entitlements, shows that we cannot underestimate the importance of measures linking state pension age to life expectancy and auto-enrolling workers into their company pensions.

In July it was decided state pension age increase should be brought forward to 68 between 2037 and 2039, due to increases in life expectancy.