State pension funding will be depleted by 2035, GAD warns

The UK Government’s auditing body has warned that funding for the national state pension could be depleted by 2032. As Britain’s ageing population sees retirement numbers set to boom, the Government Actuary Department (GAD) suggested that, without a rise in National Insurance Contributions, the country could face a massive pensions deficit.

The rate at which Britain’s population is ageing is perhaps best illustrated by dramatic spikes in dementia and Alzheimer’s disease among UK residents. The degenerative conditions recently became the top causes of death in the UK for the first time. Such is the rate at which citizens are now reaching retirement age, that the GAD have suggested that a 5% rise in National Insurance Contributions (NICs) could be needed to avoid a pension crisis.

Without such an increase, the Government’s actuarial body predicts that the national pension pot will deplete by within 14 years. The numbers assume that the current policy of triple-lock holds, and the state pension age rises in line with expectations before 2032. At present, the UK spends £100 billion per year on the State pension, and that this is expected to double twice over the coming four decades.

The warning from the GAD will have added further concern to the state of Britain’s private pension funds. In 2017, a report from Willis Towers Watson revealed that the total assets of the 300 largest pension funds worldwide has increased by about 6% in 2016 to $15.7 trillion. Worryingly for the UK, not one of the nation’s pension funds made the top 20 of the list, with Britain now accounting for just under 5% of the global pension pot.

Coming crisis

Steven Cameron, Director of Pensions at pensions and assets management firm Aegon, said of the warning, “What many people may not realise is there’s no big pot of money set aside to pay future state pensions. Instead, they are funded on a ‘pay as you go’ basis meaning future state pensioners are reliant on the NI contributions of future workers to pay their pensions, creating the potential for intergenerational tension. There’s always a trade-off to be made between state pension age, the yearly amount of state pension paid out, other benefits NI pays for such as the current hot topic of social care, and at what rates NI contributions need to be set to cover these costs.”

Also commenting on the grim outlook, Calum Cooper, a Partner at pensions and investment sector consultants Hymans Robertson, added, “It is not surprising that the GAD has reached this conclusion that state pension funding levels are dwindling. The current system is dangerously unsustainable when you consider how technology and rising life expectancy could transform our working landscape over the next decade or two.”

According to Hymans Robertson’s own analysis, the state pension age has not kept pace with the increases of life expectancy following the end of the Second World War. This means that the generation known as the Baby Boomers which have reached retirement age have put the system under a strain that it was inadequately prepared for – particularly as the following generation reach retirement age themselves. By the consultancy’s reckoning, the current age of retirement would be 74, had this occurred.

With falling birth rates, some critics of the present system have warned that this may also lead to a depletion in working age tax payers, meaning either a rise in NICs will have to occur, or a deficit will open up. This could be further exacerbated, should predicted potential for technological unemployment by AI be realised. According to some worst-case-scenario predictions, only 19% of jobs taken over by AI may be replaced with other human jobs in the production chain. The Bank of England and PwC have, meanwhile, estimated that 1 in 3 jobs are currently in danger from automation.

Cooper concluded, “Clearly there is a wide range of outcomes but this outcome would be massive and would have a devastating impact not only on NI financing but would cause demands on state support to reach an all-time high. Perhaps it’s time to think beyond the state pension and look towards something more age-agnostic.”