Horizon scanning – government debt

In the fifth instalment of our new blog series, Richard Butcher examines how government debt creates new risks and opportunities for pension schemes and their members.

Questions for trustees/IGCs to ask:

  • Have we factored in all the risks in our adequacy assessments?
  • Are there opportunities/gains to be made in investing in long-term capital projects?


In my blog “Up periscope – looking to the horizon” I explained why it’s important to look ahead to anticipate what may be coming and try to work out its impact. If we can work out the impact, we can pre-plan how to create opportunity or to mitigate risk.

There are three horizons to look to. The near horizon, which is stuff we’re aware and have a pretty good understanding of; the far horizon, which is stuff we’re aware of but don’t yet fully understand; and over the horizon, which is stuff we’re not aware of but still need to be prepared for. 

This blog considers a far horizon item – the impact of government debt.

It’s old news to report that the government (incidentally a proxy for the taxpayer, i.e. you and me) is broke. The level of debt being carried, relative to GDP, is higher now than it has been since the early 1960s – and back then it was on the way down.

We are, however, told we shouldn’t worry too much. Firstly, the cost of that debt is historically very low and, secondly, because about a third of it is owed to the Bank of England. This is equivalent to borrowing your annual salary from mum and dad.

Maybe it’s true – we shouldn’t worry. But even so, there are clearly implications. The level of debt restricts our ability to borrow more if we need it, must be repaid at some point and, even though the cost is currently low, it is still a cost. Debt and interest act as drags on our ability to spend in the future.

This is happening against the background of the demographic timebomb first talked about in the 1990s. In short, we are living longer, so consuming more in healthcare (the older you are, the more you go to the doctor), and drawing more in state pensions – although the individual amount is coming down from the state pension heyday, the collective demand is increasing (those pesky baby boomers again). Meanwhile, the number of babies we’re having is falling and therefore, before long, so will the supply of wealth generators and taxpayers. The resultant “dependency ratio” – broadly, adults over state pension age versus adults under it – is climbing. This was 7:3 in 1992 and is predicted to rise to just about 6:4 by 2067 (ONS).

In the context of pensions policy this can all be neatly summarised: there will be more demand for cash but less cash available. In other words, things are going to have to change.

And they already are. “Actual“ retirement ages are creeping up and state pension ages are being put up (with the pace of the second being accelerated). The result of these two factors alone means the ratio of the economically active to the inactive has stayed broadly stable or even reduced a little over the last 20 years. But this alone isn’t enough.

The seemingly endless debate around pension tax relief will go on and will have to reach a conclusion. Leaving aside the shape of relief, the main imperative for this is quantum. Change will come and it will be, at best, quantum neutral but more likely quantum negative. This blog isn’t the place for a debate on the rights and wrongs of this.

The government needs money to invest. It doesn’t have any, so is jealously eyeing pension cash. Investment in long-term capital projects will therefore be made easier (through the facilitation of Productive Capital investment and a potential relaxation of the DC charge cap) and there will be more pressure on pension schemes to do so. Intriguingly, the Government has suggested there’ll be no compulsion, but the very fact they felt it necessary to say that demonstrated that compulsion is on someone’s mind.

The government isn’t going to be able to spend its own money, so it makes life easier for the taxpayer by spending others’ money – as it did with the charge cap. This will continue. They’ll drive the value and transparency agendas with the hoped-for outcome of greater competition. They may also “open up” pensions to other forms of permitted spending. They’ve done this in the past with advice costs and they’ve previously pondered financial resilience payments. Covering long-term healthcare costs is, I suspect, almost inevitable, and there’s even been talk of using pensions as an alternative to mortgage lenders.

So, the pressure is on. The level of government debt will drive fiscal change. The question for us is how do we minimise the risks and how do we make the most of the opportunities?


Summary table

The impact of government debt

Short term

DC charge cap will increase, and “technical fixes” will facilitate investment in longer-term capital. Tax debate will reach a conclusion. Healthcare cost debate will rumble on.


Tax relief changes will be implemented. There will be some investment in longer-term capital. Healthcare cost changes will be a manifesto commitment.


Healthcare cost changes implemented.


Adequacy risk increases.


Other blogs in this series:

Up periscope - Looking to the horizon

An ageing society

A connected society

DC (in)adequacy

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