Sir, - The recent Government decision to set aside monies to fund future pensions expenditure on State employees takes place within the context of a much wider debate in all developed countries about the funding of future obligations.
In most of the continental EU countries (e.g. France, Italy, Spain) the State assumes the greater part of future pension obligations even for private-sector employees whereas in the English speaking countries the greater part of the private sector burden falls on the employer or the individual.
Thus with vast private pension fund assets accumulated in the English speaking countries, these countries are said to have funded future outgo or expenditure whereas in most of the continental EU pensions are said to be unfunded - which will lead to a huge strain on the state finances down the road.
However, this argument is a myth. For the sake of comparison let's take Britain (private funding) and France (state obligations). Britain has by far the larger stock market which reflects the accumulation of private pension fund assets. However, most of the stocks in Britain are non-industrial companies such as banks, insurance companies, retailers etc. The future of these companies depends on the performance of the British economy which in turn depends more than any single factor on Britain's long-term industrial performance since it is only the industrial sector that has the capacity to lead the rest of the economy. If industrial performance falters - as it has done in Britain since the 1970s - then ultimately other sectors will contract which will reduce their capacity to pay dividends from which pensions will be paid. In France, by contrast, the industrial base is far more solid in sectors from cars to trains to aviation. This leads to a greater capacity to generate future economic growth which will provide the state with a revenue base from which to pay pensions. Pension funds can also invest overseas but the ability of a country to make net capital investments abroad depends on it running a consistent trade surplus which again depends on industrial competitiveness. Accordingly a country's ability to meet future pensions obligations is inextricably linked to its industrial competitiveness.
Thus, whereas the ability of the Irish Government to set aside monies to fund State pensions is a welcome sign of rude financial health, the ability of the State to meet future obligations will be determined to a much larger degree by the country's long-term industrial performance.
Paul Dixon Fellow of the Institute of Actuaries Zurich, Switzerland