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.
Cass Business School,
London EC1, UK