A pension system that is unfair and unaffordable

Zoe Williams seeks to stimulate a debate about pensions and intergenerational inequality, but seems to have overlooked the issues surrounding the funding of public-sector defined-benefit (DB) pension schemes (All this talk about ‘difficult’ cuts, yet the largest part of Britain’s welfare bill is never mentioned. Why?, 21 May).

Such schemes place enormous pressure on public finances; they typically require a more significant employer contribution – often more than 25% – compared with private-sector defined-contribution (DC) schemes, where employer contributions of around 3%-8% are typical.

It is estimated that the total inflows from public-sector pensions (employer plus employee) are around £50bn per annum – all funded directly from the taxpayer. An additional £5bn per annum or so is then required from the Treasury to fully cover the £55bn bill for public-sector pensions in payment, which are often index-linked to RPI.

Private-sector contributions also benefit from the taxpayer in the form of tax relief (so might be considered to be around 20%-45% taxpayer funded) but private-sector DC pensions in payment have very few guarantees and amounts payable are dependent on investment performance.

And then there is the long-term impact on public finances. Private-sector pensions are cash-funded by employer and employee contributions (and tax relief), whereas many public-sector schemes are unfunded and therefore create a potentially unlimited liability to future taxpayers. It is suggested that the current total liability of those pensions is more than £1tn.

The majority of people (about 85%) under 30 work in the private sector, so they will not benefit from public-sector DB pension schemes, and yet they will probably have to foot the bill for many decades to come. So alongside considerations on tax relief on private pension contributions, perhaps it is time for us to also be more transparent about the full economic cost of unfunded public-sector pension schemes, their impact on intergenerational equity and whether it is possible to move to a more sustainable and affordable model. Prof Stephen CaddickWorthing, West Sussex

Zoe Williams states that pension benefits and the state pension amount to £178bn annually. She could add that the state pension alone is forecast to cost £146bn for 2025-26.

Bearing in mind the ongoing impact of the triple lock, this level of expenditure is not sustainable and is unfair on those of working age, resulting in generational imbalance.

As a beneficiary of the triple lock, I would be content to see it replaced by a double lock, ie annual increases linked to inflation or earnings, whichever is higher. A powerful case for this has been made consistently by the Social Market Foundation.

Tinkering with the triple lock will be a potential political landmine, but the risks of avoiding the issue are too great.Mike PenderCardiff

The state pension is not a benefit. It has been paid for by the recipients throughout their working lives to a set of rules defined by the government. Those that have not made additional provision, say a private pension, are very likely to have to claim a benefit in order to get enough to live on.

Those that have made some additional provision will find that the tax allowance is just sufficient to avoid paying tax on the state pension, but very nearly all the rest they receive is fully taxed. If you do a comparison with similar countries – say, those in the EU – the UK is a long way from the top of the list.Alan GoughManchester

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