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Pension Costs Could Hit UK Rating, Says S&P 

By Daniel Brooksbank, IPE.com 

United Kingdom

December 19, 2005 

IPE.com 19/Dec/05: UK's rating agency Standard & Poor has warned that rapidly rising state pension costs could hit the UK sovereign debt rating in the long-term. 

S&P noted that the Treasury has raised its forecast of state pension costs in the 2050s to 6.6% of GDP, from 5.6% earlier. And the recent Turner report also flagged up higher state pension spending. 

The implications of this are that state pension costs may well rise more rapidly than the Treasury currently forecasts, which will require appropriate policy responses to prevent fiscal indicators from deteriorating in a way that could, in the long term, jeopardize the ratings on the sovereign, S&P said. 

It said the recent upward revisions reinforce the importance of fiscal prudence today to ensure budgetary sustainability in the future.

"In our view, the Treasury's forecasts are still somewhat optimistic, even after the recent upward revisions," said S&P analyst Moritz Kraemer. 

"In particular, we expect U.K. state pension payments to rise over time compared with earnings, since British pensioners currently receive the lowest benefits in the EU, when measured as a proportion of workers' wages." 

S&P said this view is supported by the proposals in the recent Turner report. Among them was a plan to re-introduce indexing the basic state pension to earnings. 

As early as 2002, Standard & Poor's had flagged the possibility that the downward trend in the basic state pension as a proportion of earnings witnessed since the 1980s would eventually become politically unsustainable, the agency said. 

"In practice, however, the prospect of improving budgetary performance appears to be receding further into the future, with the latest pre-budget statement confirming the fifth consecutive year of rising general government deficits in 2005, and raising borrowing forecasts for this fiscal year and the next," said Kraemer. 

S&P added that the government is relying primarily on increased revenues to curb the budget deficit although revenues have already underperformed budget assumptions for four consecutive years. And there the prospect of a general election before May 2010. 

"This risk looks all the more real, in a context where cool reactions to the Turner report suggest that the political case for fiscal prudence today, to better manage the costs of an aging population in the future, has still to be made," Kraemer said.


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