UK - A Conservative MP has challenged the Treasury to reconsider pre-funding of certain public sector pensions through the introduction of a future fund.

Speaking in parliament, Richard Fuller argued that, in the name of “intergenerational fairness”, the reform - which has been considered and ruled out several times in the past - should be re-examined.

He pointed towards the success enjoyed by resource-rich countries such as Australia and Norway in launching pre-funding arrangements for their respective public sector and national insurance liabilities.

He said the scheme - which he estimated should be funded with £20bn (€25bn) to £30bn a year to address more than £1.1trn in public sector liabilities - would allow for the creation of the UK’s own sovereign wealth fund to boost the economy.

“Some may say taking £20bn out of public expenditure when we are trying to create demand is a very odd suggestion, but, of course, the £20bn would not be lost from the economy,” Fuller said.

“Essentially, £20bn would be transferred from current expenditure to an investment fund for long-term investment. That money would become a fund of resources that could be used to invest in long-term projects.”

He pointed towards the funding of Australia’s Future Fund through the privatisation of telecoms provider Telstra as an example worth following, and that the eventual proceeds of the sale of the Royal Bank of Scotland should be diverted into such an arrangement.

In response, the economic secretary to the Treasury Chloe Smith referred to Lord Hutton’s report on public sector pensions that previously ruled out the use of such pre-funding and said there could be risks in the government launching such a substantial sovereign fund.

“The funding status does not determine the sustainability or affordability of pensions, or the size of liabilities built up over time,” she added.

“Unfunded pension schemes are commonly used by governments because they are the most cost-effective way to provide pensions benefits over the long term.”

Smith pointed towards the use of Ireland’s National Pensions Reserve Fund to shore up the country’s banks to note that not all was “rosy” with the use of funded schemes.

In other words, companies in the FTSE 350 were able to lower liabilities due to overestimating the discount rates, a survey by Hymans Robertson has found.

The consultancy said the range of discount rates employed by companies was wider than in 2010, with 32% of companies using a discount rate 20 basis points higher than the AA yield, compared with 92% of companies getting within 10bps of the yield in the previous survey.

Additionally, the consultancy found that increasing numbers of schemes had now switched to using the consumer prices index as a source of indexation, coming in the wake of the government’s decision to employ it as the benchmark inflationary measure for public pension schemes.

Lastly, the Financial Services Authority - the outgoing UK regulator - has seen its pension deficit fall by £7m over the previous year, due in part to a change in its inflation assumptions.

However, as a result of falling corporate bond yields, the deficit increased by £31.7m, offsetting both these gains and ones that arose from increased contribution and asset investment performance.

However, the scheme’s overall deficit currently stands at £107m, with the FSA committed to a recovery plan that should see the shortfall resolved by the end of 2021.

The final salary scheme is currently fairly immature, with fewer than one in five members in retirement.

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