The public sector pensions time bomb

2004

The UK government has unfunded public sector pension liabilities of approximately £580 billion and will have to hike taxes or cut public spending to pay for it, according to a new report.

Figures from actuarial consultants Watson Wyatt estimate that the government’s own pensions ‘black hole’ is almost 50 per cent larger than the most recently published official estimate of £380 billion in March 2002.

Changes in the way liabilities are calculated – bringing them more in line with the private sector – further accrual of benefits and improvements in life expectancy have significantly increased the present value of unfunded pension liabilities in the public sector over the past two years.

The sum equates to a public sector pensions bill of some £12bn a year – or more than 6 per cent of GDP - even before the recent surge in the number of public sector workers is taken into account.

The majority of the liability – some 80 per cent - was in the pensions of teachers, the NHS, civil service and armed forces, Watson Wyatt said.

Stephen Yeo, a senior consultant at Watson Wyatt, said: "The pressure that has forced the private sector to account for pension costs in a transparent way is only slowly having an effect in the public sector. Given the enormous size of the liabilities involved, it is vital that the true cost of all pensions is recognised."

Unlike employees in many private sector organisations, public sector workers still receive generous final salary pensions paid for by the taxpayer. But because these schemes are operate on a ‘pay-as-you-go’ basis, any rise in their cost can only be met from the public purse.

Mr Yeo also warned that the government was underestimating the rate at which its liabilities were increasing. Rather than the officially-calculated rate of increase of £30bn a year, he said he believed the true figure was around £46bn - almost 5 per cent of the UK's GDP.

This huge liability can only be met by raising taxes or cutting services, something that will not be well-received by private-sector taxpayers who are contemplating increasingly precarious retirements. And since the liability already exists, no amount of axe-wielding in the civil service will make any impression on its size.

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