Uncertainty in pension funds

April 28, 1995

In discussing additional voluntary contributions to the Prudential or other insurance company (as opposed to the added-years scheme) Michael Connock (THES April 14) draws attention to the value of the accumulating fund being dependent upon the insurance company's investment returns.

This introduces a measure of uncertainty in forecasting the future benefits. However, there is a second area of uncertainty which may be overlooked. At retirement the fund is converted into an annuity. The amount of pension depends upon the annuity rates at that time. These rates can fluctuate widely so that it is possible to find the size of the pension of the order of 20 per cent lower than had retirement taken place a year earlier. In terms of investment performance the insurance company can smooth out investment returns but is unable to do this with annuity rates.

D. F. BALL Market Harborough

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