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What is a Promise from the Government Worth? Quantifying Political Risk in State and Personal Pension Schemes in the United Kingdom

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  • DAVID BLAKE

Abstract

There are three key types of political risk facing pension schemes: those induced by demographic, economic, and pure political factors. The state scheme in the United Kingdom has been susceptible to all three types since 1980, with the result that the annual real internal rate of return on the second‐pillar state pension for the average male worker fell from 5.1% to 1.5% over 25 years. The flat‐rate, first‐pillar Basic State Pension has also experienced a fall in its IRR of 3 percentage points as a result of the indexation basis changing from earnings to prices.

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  • David Blake, 2008. "What is a Promise from the Government Worth? Quantifying Political Risk in State and Personal Pension Schemes in the United Kingdom," Economica, London School of Economics and Political Science, vol. 75(298), pages 342-361, May.
    • Handle: RePEc:bla:econom:v:75:y:2008:i:298:p:342-361
    DOI: 10.1111/j.1468-0335.2007.00612.x
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    1. Lindbeck, Assar, 2003. "Improving the Performance of the European Social Model - The Welfare State over the Life Cycle," Seminar Papers 717, Stockholm University, Institute for International Economic Studies.
    2. Axel Boersch-Supan & Christina B. Wilke, 2004. "The German Public Pension System: How it Was, How it Will Be," NBER Working Papers 10525, National Bureau of Economic Research, Inc.
    3. Blake, David, 2003. "Pension Schemes and Pension Funds in the United Kingdom," OUP Catalogue, Oxford University Press, edition 2, number 9780199243532.
    4. John B. Shoven & Sita N. Slavov, 2006. "Political Risk Versus Market Risk in Social Security," NBER Working Papers 12135, National Bureau of Economic Research, Inc.
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    2. Erzo F. P. Luttmer & Andrew A. Samwick, 2018. "The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security," American Economic Review, American Economic Association, vol. 108(2), pages 275-307, February.

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