Funding Public Sector Pensions

Radiantsoul

I am curious as to why the Hutton reform did not suggest that public sector pensions ought to be at least partially funded.

It strikes me as logical that the 6% deducted from salaries ought to be used to build up a pool of assets(probably held in some sort of foreign assets that are untouchable, save for paying pensions).

It strikes me that public sector pensions offer a pretty massive downside in that all those years of paying in don't build up any assets, merely a presumed liability on behalf of the government. But I am not sure if the government is legally oblidged to pay anything(and can inflate the "debt" to zero anyway. So in effect you are paying in quite a lot for nothing more than a promise that might not be honoured.

beecher2

My local government pension is fully funded.

From the report itself

On the issue of whether schemes should be funded or unfunded, the interim report
suggested that it was reasonable, on balance, for government to structure public service
pension provision on a mainly unfunded basis.16 Funding is not needed to safeguard
statutory benefit promises backed by the taxpayer and effective, transparent long-term
fiscal planning can be used to help manage risks. This is discussed further in Chapter 6. It
is doubtful whether increasing government taxation or explicit borrowing to invest monies
in pension funds would lead to higher economic growth. Funding schemes through gilt
issuance would probably result in an increase in the cost of government borrowing and there
would be investment management costs and risks if the schemes moved to a funded basis.
And, as the interim report noted,17 the transitional cash flow effect of moving to funded
pensions could be £20 billion or more a year for many years

Radiantsoul

Interesting comments, although I would say that "transparent long-term
fiscal planning" is impossible. No-one predicted the explosion in UK debts, Clinton left the US government with the issue of government surpluses extending for decades that disappeared, etc.

I would hold the cash in foreign securities(meaning the UK taxpayer would still have some exchange rate risks).

Andy_L

There a 2 reasons to fund a pension scheme:

1. Protects pensions from the employer going bankrupt - not really an issue for a Goverment and if it did then your funded schemes are
2. Reduce costs by "gambling" on the stock market

The downsides, for public sector schemes
1. Short to medium term it doubles the cost as exiting contributions need to be invested rather than used to pay existing pensions
2. It means the governemt becomes one of the biggest shareholders in the country. This runs the risk that they might use their clout as shareholders to manipulate the private sector or the size of the pot influences government policy.
3. Pension schemes use a lot of government issued bonds to meet their debts so you'd have the goverment borrowing its own money - a fairly pointless paper shuffle

Loughton_Monkey

For very large government pensions - including state - a funded arrangement would make it more 'tidy' but not necessarily more efficient.

More importantly, though, there probably ought to be more government 'thought' about social trends generally, and the cost of them. Not just pensions. Just as an example, take education. Birth rates are well known and reasonably accurately forseen 5 years before educational requirement. Has anyone noticed any government seriously planning resources and budgets well in advance? No! They prefer to wait until it 'happens' [shock horror]. Ooohh look at the number of kids turning up at school..... will have to increase class size.....