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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