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National Insurance Fund |
Politicians try to believe that there is no such thing as a National Insurance Fund. This example from Oliver Letwin, Conservative MP for Dorset West, is fairly typical.
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....you are unfortunately mistaken in believing that there is anything in existence by way of a National Insurance fund. If only there were! Actually, although there are things called National Insurance contributions, all the money goes in each year to the general taxation pot and all the pensions are paid out of that pot, competing for funding with all the other calls on the public expenditure. |
He is confusing the NIF with the unfunded public sector schemes. Under these schemes, contributions go straight into the Consolidated Fund (Treasury) and all benefits are paid out of that same fund.
Others take a patronizing approach, acknowledging that we frozen pensioners "like to believe" that there is a National Insurance Fund. They tell us there is no pot at the end of the rainbow, earmarked for our pension.
Well we have some news for them. Here is an extract from a response from the auditors of the NIF, following a request under Freedom of Information.
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2. Would you please confirm that the NIF exists as a fund quite distinct from ‘other public money’, that is, the Consolidated Fund. Both the National Insurance Fund and the Consolidated Fund are distinct legal entities. Separate accounts prepared for both Funds and presented to Parliament. All surplus funds are retained in the National Insurance Fund. |
Here is what we found on a government web site http://www.government-accounting.gov.uk/current/content/ga_27_3.htm
27.3.1 Parliament may authorise the setting-up of statutory funds to finance certain types of services. The main example of this is the National Insurance Fund. The legislation setting up such funds should indicate how they will operate and place responsibility for this on a department or other body. The accounts of these statutory funds are audited by the Comptroller and Auditor General, and published and presented to Parliament as so-called “White Paper accounts”.
27.3.2 The National Insurance Fund was established in its present form on 1 April 1975 (Social Security Act 1975) from the merger of the National Insurance and Industrial Injuries Funds and the National Insurance (Reserve) Fund. In 1989, the Redundancy Fund was also merged with the National Insurance Fund. In 1999, responsibility for the Fund was transferred from the then Department of Social Security to the Inland Revenue.
27.3.3 The Fund derives most of its income from contributions paid by employees and employers (including the Crown as employer), and from contributions paid by self-employed and non-employed persons.6 The income of the Fund also includes interest on and any money it deposits with the National Debt Commissioners.
27.3.4 Expenditure charged on the Fund is, broadly, to meet the cost of contribution-based benefits and some redundancy scheme payments. The benefits are mainly retirement and widows' pensions, the contributory element of the job seekers' allowance and incapacity benefits as well as the cost to government departments of the administration of the Fund. The gross costs of administration are voted by Parliament, and are then offset by appropriations in aid from the Fund. Expenditure from the Fund forms part of Total Managed Expenditure (TME), with benefit payments being Annually Managed Expenditure (AME) and administration costs being mainly within the Departmental Expenditure Limits (DEL). The two largest departments involved are the Department of Social Security and the Inland Revenue.
27.3.5 The Government Actuary is required to review the operation of the Fund every five years and to examine the long-term level at which the Fund stands in relation to likely demands for payments from it. The Government Actuary's report is laid before Parliament.
6. The contributions also include elements in respect of the National Health Service and employment protection. The former are not received as receipts of the National Insurance Fund but are paid over, net of collection expenses, to the health departments.
And here is what the law says in the Social Security Contributions and Benefits Act 1992:
| Outline of contributory system | 1.—(1) The funds required—
(a) for paying such benefits under this Act as are payable out of the National Insurance Fund and not out of other public money; and (b) for the making of payments under section 162 of the Administration Act towards the cost of the National Health Service, shall be provided by means of contributions payable to the Secretary of State by earners, employers and others, together with the additions under subsection (5) below. |
And in the Social Security Administration Act 1992
| General financial arrangements. |
163.—(1) There shall be paid out of the National Insurance Fund— (a) benefit under Part II of the Contributions and Benefits Act; (b) guardian's allowance; (c) Christmas bonus if the relevant qualifying benefit is payable out of that Fund; (d) any sum falling to be paid by or on behalf of the Secretary of State under regulations relating to statutory sick pay or maternity pay; and (e) any expenses of the Secretary of State in making payments under section 85, 97 or 99 above to the extent that he estimates that those payments relate to sums paid into the National Insurance Fund. |
When it says "contributions payable to the Secretary of State" it does not, of course, mean that it goes into his bank account. And it does not mean that is is paid to the government. This is just the formal way of saying it is paid to his department to be paid into the NIF, and all benefits are paid out of the NIF. Any surplus contributions not needed for that year's benefits and expenses must be invested in government securities, called "Gilt-edged Securities" or just Gilts.
The government does not break these laws, but manages to subvert the law, to get its grubby hands on the NIF, by using the invested funds in any manner it chooses. Bear in mind that money invested in gilts is lent to the government, so the government actually borrows that money. The NIF is not the only institution that invests in gilts. There are many many billions of £ of gilts on issue at any one time.
Under one of the government's own fiscal rules, the Golden rule, it must use borrowed funds only for investment. It claims that it needs our money for building schools and hospitals etc.. It claims this just to make us look mean and stingy. Who wants to deprive our children of a good education and health care?
Of course, expenditure on schools and hospitals never appears in the NIF accounts. But by carefully controlling the level of contributions and benefits, the government ensures that there will never be a need for these investments to be called in by the NIF, thus the investments become in effect a permanent loan to the government.
When the surplus money is invested in gilts (lent to the government) it still is the property of the NIF, which can turn it into cash when needed by selling on the Stock Exchange. There is a huge and active market for gilts through the London Stock Exchange.
Interest on the gilts is paid into the NIF just like any other investor.
The accrued surplus on the NIF is huge. By the end of the current fiscal year it will be over 100 times the annual amount needed to unfreeze our pensions, enough to unfreeze us for the next 100 years!