Closing system

Five-Year Review 2020 – GOV.UK

Focus on the National Insurance Fund

The government actuary has published his Quinquennial Review (QR) on the National Insurance Fund (NIF) for Britain.

It is carried out every 5 years by the Government Actuary Service (GAD). It examines the long-term relationship between benefit payments (mainly state pensions) and contribution income (mainly national insurance contributions) and projects them for each year up to 2086.

Forecast fund balance

The QR, which provides information to MPs, shows that the current balance of the NIF is expected to increase until it peaks at just over £100 billion in 2032. The NIF is then expected to run out by 2044.

If these projections materialize, UK Treasury grants to the NIF will be required from 2040. The QR also predicts that by 2058 the required grants will exceed the maximum currently allowed by legislation.

Amortization contribution rate

The equilibrium contribution rate is a measure of the level of national insurance contributions needed each year to match benefit payments with contribution income.

The current national insurance contribution system provides for contributions of around 22% of earnings, which is close to the current equilibrium contribution rate. By 2086, the steady-state contribution rate should be 33.6%.

Demographic change and other drivers

The main reason for this increase in the steady-state contribution rate and the projection of the depletion of the Fund is the expected increase in the ratio of retirees to people of working age. Currently, this figure is around 27%, but it is expected to rise to around 43% by 2086, leading to higher benefit costs relative to contribution income.

The projections assume that the triple lockdown applies indefinitely and that increases to the state retirement age are in line with the 2017 retirement age review.

The triple lock contributes to rising benefit costs relative to contribution income and is the second most important factor after demographic change. Increases in the statutory retirement age have a modest effect on reducing benefit expenditure relative to contribution income.

GAD processes

This QR has been produced using a project management framework that incorporates both our annual Up-rating report and this QR as a single project.

This has led to the delivery of this QR in our contemporary and accessible reporting style that is both efficient and timely.

Principal Consulting Actuary Chris Morley commented: “GAD’s annual rating improvement reports are a key part of the annual rating improvement process, but necessarily focus on the short term. This review complements that analysis to give readers a more complete picture.