As Britain's public sector trade unions launch a day of action against plans to change their generous pension arrangements, new figures have revealed that the cost of meeting Britain's public sector pension liabilities now dwarfs the national debt and is rising at a rate of £35 billion a year.
Unfunded public sector pension liabilities will be approximately £690 billion in March 2005, according to consultants Watson Wyatt.
The figure is the equivalent to £11,500 for every person in Britain and more than 60 per cent higher than the most recent Government estimate. It is also more than half as much again as the UK's £417 billion of public sector debt.
The figure of £690 billion, calculated on the basis of private sector accounting rules, is the amount the government would need to meet the pensions of the 3 million public sector workers with unfunded pensions.
Unlike private sector employers, public sector pension are not backed by pension funds but must instead be paid directly out of government funds.
Britain's public sector employs some18 per cent of the working population but has 36 per cent of the nation's pension rights.
Stephen Yeo, a partner at Watson Wyatt, said: "Companies now have to account for their pension liabilities on their balance sheets in a transparent way. Given the enormous size of public sector pension liabilities it is vital that they too are properly accounted for.
"The most recent official estimate put the present value of the liabilities in all the unfunded public sector pension schemes at £425 billion at 31 March 2003.
This is a significant underestimate because it assumes that very high rates of interest can be earned. Once account is taken of current low expected real returns, two years further accrual and improving mortality, this figure increases by over 60 per cent to £690 billion."
The bulk of the liability for unfunded pension schemes – some 78 per cent - relates to the four large schemes for teachers, the NHS, Civil Service and Armed Forces.
Smaller schemes exist for police, the fire service, various Scottish bodies and other groups. However the Local Government Pension Scheme is funded and was excluded from the figures.
At the heart of the problem lies the huge increase in the number of public sector workers, which has risen from of 4.7million in 1997 and will reach more than 5.3 million next year.
Just halting the rate of increase in the £690 billion deficit would cost the equivalent of an extra 4p on income tax, it has been estimated.
But as unions intensified their campaign against plans to raise the public sector pension age from 60 to 65, private sector employers bluntly rejected their arguments.
"The government is absolutely right to raise the public sector retirement age to 65. Without such a move, pension costs would grow even larger placing yet more pressure on the private sector that has to fund this bill," said Bill Midgley, president of the British Chambers of Commerce.
"It will also bring public sector workers into line with their private sector counterparts.
"Businesses have had enough of overly-generous public sector pensions. We would like the government to go further by raising the level of pension contributions that employees make.
"We cannot have the public sector holding the government to ransom. The Government must stand firm and not bow to union pressure."