An Appreciation of the Pensions Scene Today
| Published date | 01 July 1982 |
| Pages | 9-11 |
| DOI | https://doi.org/10.1108/eb057265 |
| Date | 01 July 1982 |
| Author | Derek Bandey |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
An Appreciation of the
Pensions Scene Today
by Derek Bandey
President, Society of Pension Consultants
Pension funds today represent a significant part of the Na-
tional economy. With £40bn of invested assets and a cash
flow of some £4bn annually it is not surprising that they
feature in press comment and that employers are much
concerned about this most expensive single item of
employment costs, other than direct salaries.
The criticisms levelled at employers for failing to pro-
vide "adequate pensions" are likely to increase rather than
decrease over the next few years especially while inflation
runs at its present high level. The volubility of observations
by the press and others indirectly concerned, such as politi-
cians and trade unions, will often be in inverse proportion
to their knowledge of what is admittedly a very difficult
subject.
But there is another dangerous voice — the voice of
justification. The voice justifying the provision of, for in-
stance, index-linked pensions and of the maintenance of
the real pension values on changing jobs — all common
property in the public sector. This voice is frequently back-
ed up by the most spurious arguments. One very effective
way of justifying the cost of a given provision is not to
know the cost; so how better to cloud the issue than to
denigrate funding and eulogise the euphemistic "Pay As
You Go" (PAYG) system. The use of language today be-
ing such that the euphemism means precisely the opposite
of its apparent meaning!
Learn from the French
This is not to say that there is anything manifestly wrong
in seeking to preserve pension values. Of course there is
not; we all want a pension that preserves its purchasing
value when we
change
jobs and, more particularly when we
become a pensioner. What is manifestly wrong is to
assume that this happens by magic. It does not; it happens
only through the deployment of additional financial
resources or the redeployment of such existing resources.
The unreality of propounding the "PAYG" system as
the panacea for our pension problems is often compound-
ed by the apparent justification for it as evidenced in Con-
tinental Europe and particularly in France. The pro-
ponents frequently fail to disclose the facts — which
perhaps is not surprising.
There is a growing number of misguided people who
seem to believe that as long as you do not have to face up
to the cost of something, then that cost is irrelevant. The
most earnest rebuttal of this "cost plus" mentality is called
for. The cost of the pension has to be met whatever the
system used to finance it. The current payment method
(i.e.
the present generation funding its own benefits out of
its own earning capacity) has the benefit of proper finan-
cial disciplines applying to it; the alternative of the above-
mentioned euphemism which I prefer to call the deferred
payment method (i.e. leaving it all to our grandchildren in
the hope that they will have footed the bill before we die) is
an indication of the financial indiscipline of the PAYG
system.
It is often said that pensions cannot be funded to keep
pace with current and recently past inflation levels. What
an unreal statement! The reality of what is being said is
that this generation cannot afford this level of provision;
why should we then suppose that the munificence of our
grandchildren will be so much greater — especially at a
time when North Sea oil starts drying up!
Further, it is suggested that on the PAYG system all that
one has to do is to divert more of the available financial
resources from current earners to current pensioners. The
financial logic is tempting; the political problems do not of
course come in to the debate. But arithmetic can be made
over simple and PAYG is viable as the provider of benefits
only in a demographically advantageous situation or where
the provider has an unlimited licence to print money.
Look at France. We are told that this is the classic exam-
ple of the validity of the PAYG arguments. Yes indeed, let
us look at France but let us do so properly, critically and
by examining the facts. Such objective analysis will show a
surprise; it will show a lesson now being learned in France
where the ratio of income to outgo is falling. It is falling to
such an extent that remedial counteracting action is now
seen as necessary to overcome concern about the financial
considerations of their provisions. A young Frenchman
will find that his expectation is likely to be disappointed
unless there is a sizeable increase in contribution rates.
Demography is catching up with the French; their
arangements were established at a particularly favourable
demographic time and the whole picture is now rapidly be-
ing seen to change.
The truth of the matter lies in the state of the economy
as a whole. Pensions do not exist in a vacuum or as an
island unaffected by the tides of economic influence. In an
expanding and growing economy then, whatever the
system adopted for the provision, generous benefits can be
provided. Where those circumstances do not exist it is; to
say the least, foolhardy to be providing benefits as if those
conditions did exist.
The trouble is that directors of companies in the private
sector appreciate all too well these truisms. They have to
because funding of the pension provision ensures the
necessary financial discipline. There is nothing more effec-
tive,
for instance, than the immediacy of being confronted
with a proposition which will lead to a reduction in the
dividend or even passing it!
This Government is seeking to bring comparable
discipline into the public sector through monetary control.
How that will work in practice is likely to be in the reduc-
please turn to page
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JULY/AUGUST 1982 9
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