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.
A. M. HUGHES
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.
GEOFF SALTMARSH
Jackmoor House, Upton Pyne
Exeter EX5 5HY