Executive Summary
The pensions situation in the UK is one that politicians for far too long have refused to address. It has become the elephant in the room of public sector finances. The promises that successive governments have made to the public, both on the provision of state pensions and pensions to public sector employees, are simply placing too great a burden on the next generation of earners, particularly as successive governments have for the most part not provided a fund to cover these future liabilities. It is only now that the UK Government is starting to take action to address this problem.
The core objective for pensions should be to encourage all citizens, whether in the public or private sectors, to establish financial security for their retirement through fully-funded, mandatory, defined-contribution schemes. This will give all workers in future greater independence, instead of the current reliance on largely unfunded government pension schemes, including the state pension. Over time, this would leave the Government‟s main responsibility on pension provision being to provide a guaranteed minimum income to ensure those that do not have financial security have a safety net to protect them.
This paper first provides a simple explanation of pensions. It covers the state pension provided to UK citizens on reaching retirement age, government pensions to public sector employees, and private sector pensions. It looks at how these pensions are provided, the cost, and how fully the future liabilities are provided for in funds.
The paper also looks at demographics to see how the percentage of those in work may change over the next generation. It makes some estimates on how this will affect pension costs if the current system remains the same.
The paper then looks at pension provision in other countries, especially Australia, and the lessons we can learn from them.
Lastly, the paper makes various recommendations, both on what sort of pensions system we should aspire towards and on how we might manage the transition to such a system.
This paper does not comment on or examine the independence referendum. Reform Scotland believes that the pension system in the UK needs to be addressed, regardless of whether this is done by a Scottish Government in an independent Scotland or by a UK Government for the whole of the UK.