UK pensions hidden bombshell
Sunday, 12 July 2009 16:06

The true cost of public sector pensions in the UK is a ticking time bomb, and when the public realise that the explosion will rock the country.

Most companies have closed their final salary pension schemes. The reasons are pretty obvious, but began when Gordon Brown taxed the income of pension funds - it looked like a soft target, yielding 5 million pounds a year. Dear Gordon was rubbing his hands together with glee. Now the awful truth has dawned on companies and they find that the money to fund final salary schemes is no longer there, because 12 years of compound interest and that 60 billion of funds are no longer available. Thanks Gordon.

To make matters worse, interest rates are now at their lowest for hundreds of years - Bank of England Base Rate is 0.5%. That means that there is very little income being generated by the investments of existing pension funds, but pensions are still having to be paid, and new pensioners are coming onto the books every day. Admitedly older pensioners are dying off, but with the baby boomers now retiring the numbers drawing pensions is increasing every day.

The net result is that cash in pension funds is flowing out, creating an even bigger problem that makes the 'black holes' in existing funds even bigger. This is a serious problem, but one that no politicians are even willing to talk about.

Now let's look at the public sector. Their final salary pensions and generous benefits are not paid for from a fund. Instead they are simply paid by taxing those who are working. In other words the working population that is shrinking is being made to pay for the over-generous benefits handed out to public sector emploees.

It will be a brave government that tries to put the public sector onto money purchase pensions, but it's something that cannot be avoided. Whoever wins the next general election has this timebomb to difuse. It will need a Margaret Thatcher, let's hope that one comes forward.

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