In the 27th IEA Current Controversies Paper, Neil Record examines UK public sector unfunded occupational pensions.
Five important events have occurred since the IEA published ‘Sir Humphrey’s Legacy’ in September 2006:
• The Government has not published total public sector occupational pension liabilities for two years running – breaking a well-established convention.
• The Government has reduced the real (after inflation) discount rate it applies to value its unfunded pension liabilities from 2.8% p.a. to 1.8% p.a. from 31 March 2007.
• The Government has not increased the employer or employee contributions in 2007-08 to reflect the much higher current service cost that a 1.8% discount rate would require.
• The Government has explicitly chosen not to conform to the new International Employee Benefits accounting standards for the Public Sector (IPSAS 25).
• It has become clear that the Government uses two different discount rates in its pension calculations; one adheres to FRS17; the other is a fixed rate. This makes a material difference to the charging and recording of pensions costs.
This update analyses the impact of this new information, and makes recommendations.
2008, Current Controversies 27