The NI Fund's reserves don't pay down the National Debt

The NI Fund discussed in this post covers England, Wales and Scotland only. Northern Ireland has a separate NI Fund, which is excluded from the figures given in this post. However, it works in exactly the same way as the Fund discussed here. 

Sometimes the government is its own worst enemy. HM Treasury's hamfisted response to this Freedom of Information request from Trudy Baddams of the pension rights campaign group "We Paid In, You Paid Out", has caused a very silly storm.

Ms Baddams asked this question:
Can you confirm that the National Insurance Fund (NIF) is presently in surplus and by how much? Can you also please confirm how much has been paid from the fund into the National Insurance Investment Fund in the last 10 years?
In response, HM Treasury pointed her to the NIF accounts, which are produced yearly. But then it added this paragraph (my emphasis):
The latest NIF Accounts show that the balance of the NIF increased by £2,286,469,000 in 2017-18. In addition to the previous balance, this resulted in a closing balance of £24,221,220,000, which was paid into the NIF Investment Account and, in practice, used to reduce the national debt.
This final statement (highlighted) was seized upon by opponents of women's state pension age rises as evidence that women born in the 1950s were being deprived of their pensions because of government mismanagement or even downright fraud. Since then, numerous articles, blogposts, tweets and Facebook posts have insisted, sometimes hysterically, that the NIF has been "plundered" by successive governments to "pay off the national debt", and that women were "robbed" of their pensions to plug the gap.

The independent fact checking organisation Full Fact attempted to debunk the claim that the NIF was being used to pay down the National Debt. But its conclusion unfortunately reiterated HM Treasury's confusing statement:
Claim: National Insurance Contributions are being used to reduce the national debt. 
Conclusion: Some are. This doesn’t mean anyone isn’t getting paid what they’re currently due in pensions or benefits—the UK government invests the NICs that don’t go towards paying pensions and benefits on reducing the national debt.
Oh dear.

Full Fact then muddied the waters still more by discussing the slightly incestuous relationship between the NIF and general taxation (of which more shortly) and the NIF's looming insolvency. This was to my mind unnecessary and only increased the confusion. Poor effort, Full Fact. Not up to your usual standard.

Before I dive into the misleading FOI response myself, let me first debunk two contradictory myths, both of which are widely believed (often, bizarrely, by the same people):
  • The NIF is a pension fund whose assets have been raided by the Government
  • NI contributions go into a general pot and are used for whatever purpose the Government wants
Both of these are untrue.

Firstly, the NIF is not, and never has been, a pension fund. It does not have "assets under management" belonging to contributors and invested for a future return. It is a clearing house which receives NI contributions (net of a 20% contribution to the NHS) and immediately disburses them to state pensioners and other beneficiaries. Thus the NI contributions of working people pay the pensions and benefits of people who are unable to work due to old age, sickness, unemployment or maternity: in their turn, when those who have previously paid NI become unable to work, their pensions and benefits are paid from the NI contributions of other people. NI contributions are not in any sense "savings". They are more correctly regarded as tax.

However, although they are tax, NI contributions do not go into the general "pot" of government funds. The NIF is ring-fenced for the payment of certain welfare benefits including the state pension. The full list of benefits paid from the NIF is here. Nothing else can legally be paid from it.

Despite repeated claims from campaigners that the NIF has been used to, inter alia, bail out banks, bribe Tory fat cats, finance wars, fund space programs in developing countries, provide housing for immigrants, give generous benefits to idle young people and pay off the national debt, there is zero evidence that the NIF has ever paid for anything other than the things it is legally required to fund. The accounts show that the single biggest item of expenditure from the NI Fund - by far - is the state pension, which swallows up almost all NI contributions, leaving virtually nothing for other benefits. If it were not for the rises in state pension age and the ending of SERPS/S2P in 2016, the NIF would now be insolvent.

That said, the amount of state pension and benefits paid out does not depend on NI receipts, but on Government policy as agreed by Parliament. The Government guarantees to maintain pensions and benefit payments at the agreed levels even if NI receipts fall. To ensure that as far as possible the NI Fund can meet its obligations without Government help, the NIF is legally obliged to keep reserves amounting to a minimum of 1/6 of outgoings. The "surplus" to which Trudy Baddams alludes in her FOI request is made up of these "statutory reserves" plus accumulated yearly excesses of receipts over income (if any).

Obviously, if outgoings exceed income - as they typically do in recessions - reserves fall. If the NIF's reserves fall below the statutory minimum, the Government tops them up from general taxation. Between 2014 and 2016, it provided a total of £14.2bn to the NIF to rebuild its reserves, which had been depleted by the deep recession of 2008-9, the slow recovery and a sharply rising number of pensioners due to longevity increases and baby boomer retirements. So, far from "raiding" the NIF, the Government actually bailed it out.

Since then, the NIF's finances have improved, though without the Government's bailout its reserves would still be below the statutory minimum. In the tax year ending 31st March 2019, the NIF's income exceeded its expenditure by £5.7bn, raising its total reserves from £24.2bn at the time of the FOI response to £29.3bn. And this brings me to that sentence in the FOI response.

The sentence is correct to say that the way these reserves are managed has the effect of reducing the national debt. But this does not mean that the reserves are being diverted to "pay down" the existing national debt. Rather, it means that their existence enables the government to borrow £29.3bn less than it otherwise would need.

This has not always been the case. Prior to 2007, the NIF's reserves were invested in existing gilt-edged securities (government debt), which is the safest and most liquid sterling investment available in the marketplace. This was rather like the Bank of England's QE: the NIF owned government debt, but the debt still existed. This meant that although the reserves were effectively borrowed by the government to fund other spending, the total stock of government debt did not reduce.

However, in 2007 the Government moved the NIF's reserves into an Investment Account at the Debt Management Office (DMO). The DMO is the Government's internal bank, responsible for issuing government debt, accepting tax receipts and other income, and managing the government's financial balances. The NIF's Investment Account is one of several accounts managed by the Commissioners for the Reduction of the National Debt (CNRD), which is part of the DMO.

The NIF's Investment Account is similar to an "instant access" bank savings account. The DMO pays interest on the account, which forms part of the NIF's income: in 2018-19, interest paid by the DMO on the investment account was £178.4m. The funds are "on demand" and can be withdrawn by the NIF at any time.

Like any other bank, the DMO uses deposits to fund its lending and spending. Doing so reduces its need to issue public debt. The NIF's reserves thus reduce the public sector borrowing requirement (PSBR). In this sense, they can be viewed as "reducing the national debt". But this does not mean the funds are being "diverted" to other purposes. They are simply being lent out for a return. As the House of Commons briefing paper on National Insurance contributions explains:
It is worth emphasizing that these funds are being held in this account on loan… there is no question of the Government being in a position to use this facility to extract money from the Fund as an extra source of revenue.
The NIF can draw on its reserves to meet its obligations, just as you or I can draw on our "rainy day" savings if our boiler breaks down or our income isn't quite enough to cover Christmas. When the NIF does this, the DMO covers the gap by issuing more public debt. Thus, when the NIF draws on its reserves, or its reserves fall below the statutory minimum, public debt rises. And this brings me to my conclusion.

There have been various proposals to pay 1950s-born women some form of compensation for state pension age rises. Many of the proposals involve paying out some or all of the NIF's reserves. But those reserves are legally required as a buffer against short-term variations in income and outgoings. If they were paid out to 1950s-born women, they would have to be topped up from general taxation. Therefore, if the the NIF's reserves were used to pay compensation to 1950s women, public debt would rise.

Whether 1950s-born women should be compensated for their state pension age rises is a political question that I do not propose to address here, though my views on the subject are well known. But there is a desperate need for honesty about the cost. There is no solution to the WASPI problem that doesn't involve much higher public debt. The campaigners have to make the case for this being a price worth paying. I'm afraid the election result shows that so far, they have failed to make that case.

Related reading:

The real victims of the "Rape of the National Insurance Fund"
The Fund that isn't a fund
Dangerous assumptions and dodgy maths
The past, present and (uncertain) future of a Government pension scheme - Forbes
The Myths and Legends of Hypothecated National Insurance - GIMMS


  1. Thank you Frances for patiently and comprehensively covering this. When I try to explain this (that damn FOI letter) in lay man terms I use an ISA analogy.
    I do wonder if the staff member at DWP was having a big of mischief as MS Baddams had a huge record of sending them. Much of which could have been found by using online research tools. But that is only me guessing. However it came about it has been hailed as a breakthrough. Which of course it isn't. Nor has the government's acted in any way illegally or untoward.
    With your permission I would like to use this excellently
    explained Coppola Comment in the future please when this will no doubt again arise?

    1. Yes, by all means use this post again.

    2. Thank you Frances
      Lynne H x

    3. I am coming up as Anonymous sorry, but this is my only comment here. The other ' Anonymous' aren't me. Just wanted to clarify that as I certainly read in great detail and think it excellent.

  2. I totally agree with "kindness & humanity". Women have been and are suffering! What about the NHS? Didn't some of this fund to to the NHS? Weren't the government supposed to add a percentage towards this fund for pensions, NHS & some benefits? This stopped & our pensions have been stolen. Nothing will convince me otherwise!

    1. Did you even read the blog? It explains what goes to the NHS. It also explains how Government tops up the NI Fund with money from general taxation. Nothing has been stolen.

    2. You have not read the post properly. I said in the post that NI contributions go into the NI Fund net of 20% contribution to the NHS.

      The Treasury Supplement was ended in 1989. But as I said in the post, the NI Fund was never a savings scheme. Your pensions have not been stolen. There was nothing to steal.

    3. This comment has been removed by a blog administrator.

    4. I have removed your comment because it was off topic. The funding of the NHS has nothing to do with this post.

  3. Frances Coppola if that was intended to be a balanced viewpoint ...then your scales are heavily weighted .WHY?
    1. The green scheme fraud
    2.Welfare benefits come from the social fund . These fund only pays out if you've paid in .
    3. You failed miserable to explain the tripartate system and how it is no longer .
    4. That this fund is not a TAX
    5. How the NHS payments have doubled.
    6. That this fund is the people's fund and successive governments have altered the system which is the REAL reason why it will be in trouble .

    1. 1. There is no green scheme in the state pension scheme
      2. There is no such thing as a social fund in the UK
      3. This blog isn't about the triparte system or why is was replaced
      4. The NI Fund is, effectively a tax, even if you keep claiming that it is not
      5. This blog isn't about the NHS budget
      6. There is no such thing as a "people's fund" in the UK

    2. I'm afraid your points are not relevant to the subject, and some of them are wrong.

      1. There was no "green scheme fraud".
      2. Contributory welfare benefits come from the NI Fund. I provided a link in the post to the full list of benefits paid from the NI Fund. Please click on it.
      3. I have explained the tripartite system in a previous post called "The Real Victims of the 'Rape of the National Insurance Fund' ", the link to which is in "Related Reading" at the end of this post.
      4. National insurance is in fact a tax.
      5. NHS payments doubled, but NI contributions also increased.
      6. This fund is not "the people's fund", it is under Parliamentary control. Governments have every right to alter the system, provided they can get Parliament to agree. The changes made by successive governments have actually helped to keep it alive. Without those changes, the NI Fund would now be insolvent - as I said in the post.

      I'm sorry if this isn't what you want to believe, but it is the truth.

    3. Regarding heavily weighted scales: can you please list which statements in this blog are factually incorrect, and why they are so?

  4. It seems I need to remind people of the comments policy of this blog:

    - Be polite
    - Stick to the topic.

    Comments that don't comply with these simple rules will be deleted. If you persistently break these rules, you will be banned from the site.

    1. Kindness&humanity, your comment has been deleted as it did not comply with the comments policy of this site.

    2. All I ask is that whatever your beliefs, please stop for a moment and listen to the well documented suffering that is being endured by women at a time in their lives when they need the pension they worked hard for and trusted the government to honour that contract. You surely can’t deny the compassion that is needed for your sisters.

    3. This is a factual post correcting a widespread and very damaging misunderstanding of the way the NI fund works. Whether or not the 1950s women have a justifiable grievance is beyond the scope of this post. Your comment is off topic.

  5. On 31/01/2019, shortly after the FOI response in question had been issued, Pension Minister Guy Opperman has also rebutted, in Parliament, the notion that the NI Fund is used to reduce the national debt. Although I don't think he explained it quite as comprehensively as Frances Coppola did, the MPs asking the questions appear to have been satisfied with his explanation as none of them has raised the matter since.

    Moreover, the alleged abuse of the National Insurance Fund was never once raised in the state pension age Judicial Review that has since taken place, and which has dismissed 100% of the claims presented by Michael Mansfield QC.

  6. "Like any other bank, the DMO uses deposits to fund its lending and spending."

    I seem to recall BoE has clarified that banks creates money when they lend and it has nothing to do with deposits.

    Does the DMO creates money in this way too?

    1. No, that's not quite correct, Perry. Banks create deposits when they lend. But when a deposit created in the course of lending is drawn down, the bank has to obtain new deposits to plug the gap. It can't create a new deposit because that would create a new loan as well. So it has to borrow the money from some external source. For most banks, that external source is predominantly customer deposits (i.e. money deposited in the bank by the customer, not borrowed from the bank by the customer). That's what I'm referring to when I say banks use deposits to fund lending and spending. For the DMO, the NI fund's reserves are such an external source.

    2. This comment has been removed by a blog administrator.


    1. The link you have kindly provided leads to an article that I have discussed comprehensively in a previous post entitled "The real victims of the "rape of the National Insurance Fund" ", the link for which you will find under Related Reading at the end of this post. It is not relevant to this post.

  8. May I remind you that comments posted here must be about the subject of THIS post. I will summarily delete all further comments that are off topic.

  9. Lovely article. What you wrote is clear as opposed to what other people & parties have issued in misleading so-called explanations.

    One improvement to article might be the inclusion of a diagram of how it all works. A picture can be worth a thousand words.

  10. Excellent article, Frances.

    It will never be enough to convince those who truly do not want to understand, and who would rather deal in fantasy rather than fact to reinforce their pet conspiracy theories.

    For those with a clear and open mind though, it's an objective breakdown of the workings of the NIF. As you point out, there is zero evidence to support any of the outlandish claims being made.

  11. An informative and entertaining read as ever - thx, Frances.

    If that's how these institutions work, it does seem like a lot a Byzantine hoopla concealing what boils down to an MMT reality.


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