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The Actuary The magazine of the Institute & Faculty of Actuaries

Funding the Chatham Chest

With the funding of so many pension schemes currently in disarray, it is interesting to look back at funding problems experienced in the past. The Chatham Chest was the world’s first funded occupational pension scheme. Established in 1590, it paid pensions to Royal Navy seamen becoming disabled on active service. Age retirement was not a concept then in vogue the able-bodied and healthy worked until they dropped.
A seaman’s contribution was originally sixpence a month, which was 5% of his pay of 10s 0d per month. Unfortunately the contribution was expressed as a monetary amount of sixpence, rather than a percentage of pay. As pay rose, the contributions failed to keep pace. By 1662 seamen were paid 24s 0d per month, but they still contributed only sixpence to the chest. Another problem was that the contributions often took a long while to reach the chest. They were deducted from the seamen’s pay at the end of each voyage, but then had to be taken overland to Chatham. Unfortunately the treasurer of the Navy would often retain part of the money as a loan to himself or for other Navy purposes. Nevertheless there was an excess of income over outgoings which was invested in property by the governors of the chest.
Upon disablement, the unfortunate seaman had to present himself at Chatham for inspection by the governors and the chest’s two surgeons. He also had to produce a certificate signed by the officers of his ship, stating how the wound had occurred. For the loss of an arm or leg, there was a pension of £6 13s 4d per annum, for total blinding £12 0s 0d per annum, and for the loss of both arms £15 0s 0d per annum. In addition, each pensioner received an immediate lump sum, generally equal to one year’s pension, which the seamen called ‘smart money’. Could this be the origin of today’s tax-free lump sum at retirement?

Funding problems
Between 1637 and 1644 there were at any one time only about 60 pensioners. By June 1657, as a result of the First Dutch War (165254) and the war against Spain (165560), there were 800 or 900 pensioners, and some pensions were in arrears. A year later the situation was worse and some pensioners were starving. By 1600 the Navy had 156 ships and 19,500 men. A large number of ships were now paid off, at the onset of peace, and this meant that future contributions to the chest would reduce, even though the heavy burden of pensions was to remain for years. This demonstrated a fundamental unsoundness in the way the chest was financed.
An ingenious plan was therefore adopted to save the situation. The first step was to arrange for an extra sixpence per month to be deducted from wages in the case of the ships being paid off. The second step was to use these additional contributions to offer voluntary commutation of pensions, on the basis of two years’ purchase. The scheme was successful and 374 pensions were commuted for a total of £3,276.
The terms offered were favourable to the chest, since most pensioners lived much longer than two years, so why was the commutation scheme so successful? The answer seems to lie in a combination of factors. Some pensioners just needed the extra cash, leaving the future to look after itself. Others probably feared a reduction or suspension in their pension if they were deemed to have recovered. Some may also have worried that the chest would run out of money in subsequent years. Others may have found it too awkward to attend at Chatham once a year to receive the pension, either in person or by a messenger bearing a letter of attorney.
In June 1667 there was a crisis in the affairs of the chest. The annual payment of pensions at Chatham was due and the cripples were gathering, but there was not enough money in the chest to pay them. Samuel Pepys, clerk of the Navy Board, feared that non-payment ‘will make us a scorn to the world’. There were also worries that non-payment would throw a spotlight on abuses by senior Navy officials in the management of the chest’s affairs. Fortunately the money was found at the last moment, with the aid of £2,000 from the Treasury, and it was taken down by barge to Chatham on the day that payment was due. Despite the extent of the crisis, the chest still retained its property investments, which presumably could not be sold at short notice to raise cash.

The ruin of the chest?
In October 1673, the governors of the chest wrote to the Navy Commissioners, forecasting ‘the ruin of the chest’, because its income was less than its outgoings even during the present war, ‘and it is easy to foresee what will become of us when that income shall cease, and yet the charge contracted in the war remain’. From that time onwards it appears to have been tacitly accepted that any expenditure by the chest, other than that covered by the seamen’s own contributions and investment income, would be met by the government on a pay-as-you-go basis. After this the chest continued to operate until 1814, with 2,800 pensioners in 1709 and 5,200 in 1802. This shows the importance, even then, of having an employer with a good covenant!