Public service pensions - government is hiding the true cost

Liabilities estimated at £1,071 billion

In a new report for the Institute of Economic Affairs*, economist Neil Record** shows how the government is using an artificial interest rate to depress the apparent annual cost of public sector pensions, and also failing to report fairly and on time its outstanding liabilities to its pensioners.

Government Treatment of Public Sector Pension Liabilities

No figures have been published on total occupational pension liabilities for two years running – breaking a well-established convention. The government has finally used a more realistic discount rate to value the liabilities of individual schemes, although it still does not apply the international standard for government accounts (IPSAS 25: employee benefits). As far as can be seen from published figures, the government estimate of total public sector pension liabilities are now £835bn. Record produces a more realistic estimate of £1,071bn. The growth of the liabilities of some schemes has been dramatic. The liabilities of the NHS scheme have risen at 20.2% compound per annum for the last five years as recent salary increases have taken effect. This is a very real call on future taxpayers that is not properly revealed to or understood by taxpayers.

The government has refused to implement the international accounting standard for government accounts which would require it to use a risk-free rate to discount pensions promised by the government. Record has found evidence from Treasury minutes that explicitly states that the government does not wish to be “set apart from other [private sector] entities.” This can only mean, as is stated in the private sector accounting standards, that the government believes that, as in the private sector, there should be an allowance for ‘risk’ in the interest rate to “reflect the options the employer has to reduce the assumed scheme liabilities” (i.e. not pay pensions that have been promised). It should also be noted that the relevant private sector accounting standard (FRS 17) requires that pensions be funded and that the cost of pension accrual be properly recognised. The government has not applied this aspect of the standard to public sector pensions as explained below.

Pension Contributions by Employers and Employees

However, Neil Record argues that the biggest problem is with regard to the way in which contribution rates are calculated for today’s public sector workers. Perversely, the government is still u