Risks in public sector pensions

From Prof David Blake.

Sir, In his article “The correct pension discount rate” (FTfm, March 14), John Ralfe concludes that public sector pensions “are deferred pay earned as part of a legally binding contract of employment, the equivalent of giving ILGs [index-linked gilts] to be redeemed at retirement”. This is not quite correct.

Public sector pensions are equivalent to index-linked longevity bonds, and hence the appropriate discount rate should include a longevity risk premium as well as an inflation risk premium.

David Blake,

Director,

Pensions Institute,

Cass Business School,

London EC1, UK

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