Britain needs to look overseas for pension improvements

The goal of Chancellor Jeremy Hunt's most recent initiatives, such as the modifications to Mansion House, is to encourage British individuals and businesses to save more wisely for retirement. This underestimates how difficult the task will be. They must save more money as well. The pension system in Britain is already rather large. By market value, it has the second-largest financed asset base in the OECD, and as a percentage of GDP, it is the fifth-largest. It does not, however, guarantee citizens equal success.

The state pension does not provide its recipients with dignity in retirement, even with the triple-lock system in place to guard against inflation. Outside of the public sector, colleges, and railroads, strong defined benefit pensions are extremely uncommon and have been replaced with ersatz defined contribution plans. Companies' median contributions to their employees' DC pensions barely surpass the legal minimum, at 3.4% of pay. Millions of workers have benefited from auto-enrollment, a programme that has shown to be a complete success in terms of pension savings. However, it hasn't been able to provide members with the opportunity to enjoy a retirement similar to what their parents did.

Policy options are limited by persistently high inflation, sluggish growth, and a swiftly increasing public debt. Significantly less leeway is available as a result of years of political unrest, high deficits, a volatile currency, and a central bank that is having difficulty stabilising inflation expectations.

The UK is currently confronting issues that three peer countries have already encountered (Canada, Australia, Denmark). After over 40 years of consecutive current account deficits, the UK has gone from being a major net creditor to having the 11th greatest net international investment deficit in the world. Wage rises and closely related service sector pricing increases are occurring at rates that are incompatible with inflation rapidly reaching its aim.

A greater amount of pension savings would expand the money available for investment both inside and outside of the UK. Along with the resulting gains in productivity, it would lower the cost of domestic risk capital and strengthen the nation's balance of payments. The UK was a net rentier state before the 2008 financial crisis, but since then, in order to pay back foreign investors in the nation, it has had to borrow money or sell assets. This has cost the economy, on average, 1% of GDP, or over a third of the yearly current account deficit.

Now, the main factor affecting the BoE's medium-term forecast is wage inflation. A larger percentage of deferred compensation, or pensions, in wage settlements, would be disinflationary rather than lower the cost of employment for businesses.

(Sources: ft.com)