"The great secret of the Fund is that there is no Fund."

I mentioned recently that public-sector workers were likely to be demonized over the coming months as a drain on the pockets of the hard-pressed private sector. I see the process is going on apace, particularly in the realm of pensions.

Well, I'm not going to bang on here about anything as fundamentally dull as pension arrangements, but there is one aspect of the situation that doesn't seem to be well understood - by Nick Clegg, amongst others - and has led to some pretty unfair reporting.

Most, if not all, pension schemes in the private sector have investment funds into which employees' contributions are paid, and which (if the stock market does well enough) pay out in due course. You could look at pension contributions as saving together on a large scale, hopefully with the benefits of scale to match.

You might assume that public pension contributions work in the same way, but with one or two exceptions* you'd be wrong. There is no investment fund happily accruing. The pension contributions I pay in one day are paid out in pensions to current pensioners the next - a so-called pay-as-you-go scheme. This system works fine when there are plenty of workers in the system to pay current pension demands, and relatively few pensioners. In fact, over the last generation there have been many occasions when public sector contributions (particularly from the NHS) actually made a profit - a profit that was simply poured into the general Government coffers rather than being invested for the benefit of future pensioners. (Oddly enough you will search the archives of the Daily Mail in vain for the headline complaining that private sector workers were sponging off public sector pension contributions.) But of course, the system begins to come unstuck when you have lots of pensioners, and relatively few people in work paying contributions. In that situation, the shortfall has to be met by the Treasury - and that's the much-publicised liability that's set to triple over the coming few years.

Note that this tripling isn't due to the rocketing value of the pensions. It's simply the combined effect of recession (job cuts = fewer people paying into the pot), and of demographics. One aspect of demographics, the fact that people are living longer, affects all pensions schemes whether funded or not, but the other is peculiar to the pay-as-you-go variety: it's the fact that the baby boomers are starting to retire, leaving their less-numerous successors to pay their pensions.

In other words, it's another of the ways in which the sheer numbers of the baby boomers have spoiled things for the generation following them (because, whatever else comes out of the pensions review, you can be quite sure it won't propose any alteration to the entitlement of existing pensioners). But lest you think that I'm about to launch into another rant about boomernormativity, let me hasten to add that in this case it's not the boomers' fault. No. They didn't set the system up this way. That credit goes to the (otherwise-sainted) post-war Labour government, who established the principle by creating the biggest pay-as-you-go pension scheme of all. It's called National Insurance, and it's meant to fund state pensions. Many people who paid National Insurance when it began probably believed they were paying into an investment fund, but in fact then as now the money simply went into the general Government pot. As Nye Bevan is said to have remarked: "The great secret of the Fund is that there is no Fund."

This was sneaky: but then, the post-war Labour government had a pretty terrible economic situation to deal with. Rationing worse than during the war, devastated housing stock, all-round austerity. Could they really have been expected to leave a nest-egg of pension contributions untouched when present need was so much more pressing? I have some sympathy with Bevan and the others. In fact, on mature reflection I think the person we really have to blame for the present crisis in public-sector pensions is Adolf Hitler.

Now, who's going to tell the Daily Mail?

* According to R4 this morning, the main exceptions are local government employees and, er, MPs.

"The great secret of the Fund is that there is no Fund."

I mentioned recently that public-sector workers were likely to be demonized over the coming months as a drain on the pockets of the hard-pressed private sector. I see the process is going on apace, particularly in the realm of pensions.

Well, I'm not going to bang on here about anything as fundamentally dull as pension arrangements, but there is one aspect of the situation that doesn't seem to be well understood - by Nick Clegg, amongst others - and has led to some pretty unfair reporting.

Most, if not all, pension schemes in the private sector have investment funds into which employees' contributions are paid, and which (if the stock market does well enough) pay out in due course. You could look at pension contributions as saving together on a large scale, hopefully with the benefits of scale to match.

You might assume that public pension contributions work in the same way, but with one or two exceptions* you'd be wrong. There is no investment fund happily accruing. The pension contributions I pay in one day are paid out in pensions to current pensioners the next - a so-called pay-as-you-go scheme. This system works fine when there are plenty of workers in the system to pay current pension demands, and relatively few pensioners. In fact, over the last generation there have been many occasions when public sector contributions (particularly from the NHS) actually made a profit - a profit that was simply poured into the general Government coffers rather than being invested for the benefit of future pensioners. (Oddly enough you will search the archives of the Daily Mail in vain for the headline complaining that private sector workers were sponging off public sector pension contributions.) But of course, the system begins to come unstuck when you have lots of pensioners, and relatively few people in work paying contributions. In that situation, the shortfall has to be met by the Treasury - and that's the much-publicised liability that's set to triple over the coming few years.

Note that this tripling isn't due to the rocketing value of the pensions. It's simply the combined effect of recession (job cuts = fewer people paying into the pot), and of demographics. One aspect of demographics, the fact that people are living longer, affects all pensions schemes whether funded or not, but the other is peculiar to the pay-as-you-go variety: it's the fact that the baby boomers are starting to retire, leaving their less-numerous successors to pay their pensions.

In other words, it's another of the ways in which the sheer numbers of the baby boomers have spoiled things for the generation following them (because, whatever else comes out of the pensions review, you can be quite sure it won't propose any alteration to the entitlement of existing pensioners). But lest you think that I'm about to launch into another rant about boomernormativity, let me hasten to add that in this case it's not the boomers' fault. No. They didn't set the system up this way. That credit goes to the (otherwise-sainted) post-war Labour government, who established the principle by creating the biggest pay-as-you-go pension scheme of all. It's called National Insurance, and it's meant to fund state pensions. Many people who paid National Insurance when it began probably believed they were paying into an investment fund, but in fact then as now the money simply went into the general Government pot. As Nye Bevan is said to have remarked: "The great secret of the Fund is that there is no Fund."

This was sneaky: but then, the post-war Labour government had a pretty terrible economic situation to deal with. Rationing worse than during the war, devastated housing stock, all-round austerity. Could they really have been expected to leave a nest-egg of pension contributions untouched when present need was so much more pressing? I have some sympathy with Bevan and the others. In fact, on mature reflection I think the person we really have to blame for the present crisis in public-sector pensions is Adolf Hitler.

Now, who's going to tell the Daily Mail?

* According to R4 this morning, the main exceptions are local government employees and, er, MPs.