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02

To fund, or not to fund?

Open-access content Tuesday 3rd February 2015 — updated 4.50pm, Tuesday 14th April 2020
2

Icki Iqbal says: "People in the UK have expectations of a retired standard of living that the nation's resources cannot provide." (Emphasis added.) He also says: "The UK has an expectation of a standard of living that its resources cannot deliver." (The Actuary, November 2014) It would be easier to respond if we knew which of these radically different propositions was actually being offered; the first seems more within our remit. Both, in my opinion, reflect indefensible priorities. Is it too optimistic to expect society to offer as decent a basic standard of living as possible, to all its members?

We are told that: "(A) holistic approach would be to assume that each cohort should take out no more than it has put in." That may be essential to avoid trouble if the music stops in a private retirement plan, but it is elementary that it is not so in a public plan where the music is not going to stop (more precisely, if it does we will have far more to worry about than benefits, so we can proceed on that assumption). In public plans, the effect of creating a benefit obligation today for people who have not "put in" can be, and is, passed from generation to generation. Obviously, if we end up with less than an adequate long-term flow of contributions reflecting population growth, inflation, economic conditions etc, we are heading for trouble. So let's make sure the inflow is adequate over the long term. That is what we are paid for! 

Clearly, there is a serious risk if benefits earned are unfunded at the point where a private plan folds: those benefits will be lost, at least in part. However, we do a serious disservice to the public if we preach that public plan benefits should be funded in the same way. Indeed, we fail in our duty if we do not draw attention to a major risk of pre-funding public plans: the creation of a vast pool of investment capital slopping around the markets under the overall control of government.

We should also point out that even if public benefits are sufficiently pre-funded, that pre-funding is likely to vaporise in the event of an economic disaster. The one time we are likely to need it, it will not be there. 

Brian Jones

28 November

This article appeared in our February 2015 issue of The Actuary.
Click here to view this issue
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