Letter Published in the Financial Times - June 2003

by Dr. Ros Altmann

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The Editor
Financial Times
Number One
Southwark Bridge

25th June 2003


Reading Joseph Danahoo's incisive comments on Baby-boomers, self interest and cost transfer (Letters, June 25th), I was struck by the parallels one can draw with the UK's final salary pension system. The grand idea of funded schemes has not worked. Surpluses were not built up enough while schemes were immature and investment returns strong. These surpluses should have been left to grow, keeping the funds ready to pay increasing numbers of pensions as more workers retired.

Unfortunately, these surpluses were whittled away. Government taxed them, employers used them to fund industrial restructuring and took contribution holidays. Politicians kept piling on huge extra costs, which are not sustainable in the long run. Instead of a funded system, we now have a situation where schemes are generally using today's contributions to pay generous benefits to today's pensioners. There is a real danger of running out of funds before today's younger workers retire. But senior decision-makers are hoping their own pensions can be secured before everyone realises this.

Our funded system has become more like 'pay-as-you-go'. In fact, if you are worried that your employer may fail, or may not be able to afford the long-term commitment, it is perhaps more like 'pray-as-you-go'!

Ros Altmann
Governor London School of Economics

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