Letter: Lilley's funded pensions still lay a burden on the future

Letter: Lilley's funded pensions still lay a burden on the future

ir: It is claimed on behalf of Peter Lilley's proposals for pension reform, (report, 6 March) that they offer the next generation "genuine security through a real fund for its pensions".

There is plenty of historical evidence that the advance funding of pensions does not invariably provide greater security than "pay-as-you-go" financing (this year's contributions being used to pay this year's benefits). One of the arguments advanced in favour of the French system of repartition, a collective system of occupational pension provision financed on pay- as-you-go principles, is the greater security it affords by spreading the risk over the whole of society and over the generations.

In France in the 1930s there was a system of funded private pensions. It was destroyed in the 1940s by the military occupation and the severe inflation which followed it. The government had to introduce a system of levies on the working population to rescue the elderly whose retirement savings had vanished.

I presume that it is just because there is a lack of total faith in the long-term security of funded pensions that Peter Lilley's proposals provide for a guarantee by the state.

It is also often claimed that the "personalised" funding of pensions increases real investment, enabling pensions to be paid without cost to future generations of workers. These claims overlook the point that over- reliance on saving for retirement could result in investments that exceed prudent investment market opportunities. A reasonable balance should always be maintained between "capitalisation" and "pay-as-you-go" in order to obtain a broad spread of risk.

In any event, it is hard to see how "personalisation" of retirement savings can secure the provision of pensions without cost to other workers or taxpayers. All pensions are a transfer of resources from one part of the population to another. Any saving for retirement, (public or private, unfunded or funded) entails a claim on the goods and services produced by future generations of workers whether the claim is met through taxation, dividends or disinvestment.

Few would disagree with the notion that all economically active people should be encouraged to spread their own wealth from employment more evenly over their life by investing part of it, as long-term savings, in either employer-sponsored pension plans or personal retirement accounts. Few also, I suspect, would disagree with the principle that the state, as agent of the entire community, is the appropriate source of all social protection, including basic retirement income.

TONY SALTER

Richmond, Surrey