Public sector pension liability at £81 billion

Public sector pension liability at £81 billion

	Published : Tue, 28 Feb 2006 06:45 By : Andrew Stead Print this Story

LONDON: The annual provision required to cover public sector pension deficit has grown to 81 billion pounds from 24 billion pounds last year, the British treasury has said.

This is as a result of the change in the way the government works out the cost of its retirement schemes as it has moved it estimates in line with those followed by the private sector. There is no increase in the pensions paid to the pensioners.

The government had previously used a formula including a 3.5 per cent discount rate on its liabilities, but this rate has now been reduced to 2.8 per cent, nearer to what is used by the private sector. This led to a major impact mainly because pension costs are spread over several years.

While the total present value of the liability to buy pension for all the workers in the public sector stood at 540 billion pounds, estimates under the revised formula will mean that the liability will be of the order of 800 million pounds.

The increases are reflected in the government's spring supplementary estimates.

Economists have questioned why the government is not setting aside the money now instead of meeting these costs from future taxes.

The treasury data showed that provision for the NHS pension scheme in 2006 is 26.8 billion pounds (against 7.8 billion pounds in the previous year's figures), teachers' pension scheme for England and Wales 22.2 billion pounds (against 6.9 billion pounds), armed forces scheme 14.5 billion pounds (against 3.8 billion pounds), and civil services scheme 16.7 billion pounds (against 5.5billion pounds).

Actuarial experts felt the projected increases were more realistic that in the past. Almost 90 per cent of public sector pensions are based on final salaries rather than stock market returns and are inflation-proof. With the exception of very few, all the public sector schemes are unfunded and are met with taxpayers' money rather than assets created to meet the fund requirement.

In the private sector, a majority of businesses have now closed their final salary schemes.

The treasury said by way of an explanation that the figures do not represent the official measure of public sector pension liabilities. "Actual cash payments due each year from government to pay for liabilities that have been built up over decades and are due to be paid out over decades, are not affected by actuarial and accounting changes to discount rates.

"The annual cash payment from unfunded schemes will rise gradually from about 1.5 per cent of GDP now to 2.1 per cent by the middle of the century, putting the U.K. in a much better position than many other developed economies to deal with the fiscal challenges of the future."

Meanwhile, the government's plans to implement a career average pension scheme for the public sector are being resented by the employees' unions.

A spokesperson for Unison, which represents many of the 1.3 million NHS workers, said while there is talk about the career average schemes being as good as a final salary pension, and cost-neutral, they are not risk neutral for the employee.

There is also a dispute over the retirement age for public sector employees and the government, following pressure from the unions, had agreed that existing employees could continue to retire at 60, while for the new staff pension age will be 65. Talks between the government and representatives of some 1.5 million local authority workers have broken down recently over moves to prevent them retiring before 65 on full pension. The union is taking a vote on direct action.