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Pension funds and the mounting public debt

09 May 2014


From Mr A. M. Hughes

Sir, - The Revd Teresa Boyland (Letters, 2 May) thinks that paying contributions into a pension scheme makes it funded. This is incorrect.

A funded scheme has a legally separate pot of invested money. A company pension scheme, for instance, normally has a trust fund legally separate from the company's assets to hold the investments of its pension fund. Pension payments are made out of the fund.

The idea is that by investing the contributions (from employer and employees), the fund's income will be enough to pay the pensions as they fall due. Every three years, an actuary reports on whether the assets of a scheme are enough to meet its present and future liabilities, and a company can then act on the report, by changing either contributions or accrual of future benefits.

An unfunded scheme has no pot of money behind it. The cost of pensions comes out of current contributions (whether from employer, employee, or taxpayers). They are pay-as-you-go pensions. Nearly all public-sector pension schemes are unfunded: police, fire-fighters, civil servants, health workers (local-government schemes are the main exception). The state pension is also unfunded: although National Insurance contributions are used for calculating entitlement, they come nowhere near to meeting the annual cost. An unfunded scheme makes no provision for future pension payments.

Professor Northcott was quite correct in his comments about the huge liabilities that are building up. Public-sector schemes have combined liabilities of £900 billion, the state pension £3800 billion (ONS figure). This is why the Government is desperate to modify public-sector schemes, to make them less expensive, and why there is concern about there being fewer working (taxpaying) people to support increasing numbers of pensioners in years to come. This is where some people see an intergenerational injustice.

3 Moody Road, Headington
Oxford OX3 0DH

From Mr Geoff Saltmarsh

Sir, - Professor Northcott's article had the hallmarks of a prophetic utterance: he clearly stated that this is what we are doing, and this will be the consequence. It gained the rare accolade of being an article that I cut out and kept for future use.

Both the letters in the 2 May issue attempted to obscure his conclusions by making specious technical points. It is not necessary for me to know about double-entry bookkeeping for me to be quite clear that if a couple regularly fund their annual cruise by increasing their borrowing, then the inheritance that they will pass on to their children and grandchildren will be reduced by the amount of this debt. The same applies to national consumption.

Instead of such negative letters, we should have heard gratitude for his brave attempt to alert us to the situation, both financial and ecological, into which we appear to be sleepwalking.

Jackmoor House, Upton Pyne
Exeter EX5 5HY

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