Interesting figures for total pension liabilities – but only relate to the past!
Including future pension accruals would show greater strain on public finances
Public sector workers get disproportionate share of taxpayer pension spending

by Dr. Ros Altmann

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Great to see these figures finally being compiled: Well done to the ONS for its first attempt to present total UK pension obligations. This is long-overdue analysis needs to be continued, to help taxpayers understand the spending that is entailed in paying pensions to our increasingly aging population. In the past, the Government has hidden these pension obligations, but it is now making an initial attempt to quantify this future spending.

Interesting figures, but they exclude future pension liabilities – big omission: The figures are very interesting, but they also fail to include future pension liabilities, so they only relate to pensions accrued up to 2010. Given that public sector pension schemes are going to continue – the Government has promised that these workers will retain defined benefit pensions in the long-run – these future costs will continue to rise sharply. The ECB (European Central Bank) has rightly said that future liabilities really need to be included, if we are to have a proper picture of what pension liabilities will be over time. And, because there are almost no private sector defined benefit schemes left open, public sector pension spending will increase significantly relative to that of the private sector and taxpayers will have to fund these pensions in future even though those in the private sector will not have access to such generous pension arrangements.

Figures use 5% discount rate, therefore understate true future liabilities: The discount rate used for these calculations to value future pension liabilities is far too high, which means they are understated. I understand that the ONS has used the same rate that is used in the rest of the EU, which is, of course, far higher than the UK. The assumption is a 5% discount rate while gilt yields are well below 3%. The sensitivity analysis in section 4 of the ONS Report shows that every 1% fall in the discount rate equates to a 16% rise in these liabilities, which means if gilt yields are 3% (i.e. 2% lower) the actual pension liabilities are really 32% higher than shown.

Only an initial estimate but still worthwhile: This is, of course, only an initial picture and the report states clearly that the date are only ‘experimental’. Nevertheless, they give a guide to how pension spending breaks down between different components.

Huge proportion of pension spending is on State Pension: Just looking at public taxpayer liabilities for pensions shows that 77% of the future costs for past promises relate to state pension payments. 23% relate to public sector workers’ occupational schemes (with 17% unfunded and only 6% funded).

Public workers get 37% of total taxpayer pension spend: If we include the state national insurance pension rights of public sector workers, in order to assess how the total taxpayer liabilities for pensions are distributed, we see that over 30% of total spending will go to public sector workers (yet they make up only 20% of the workforce). If, say, 18% of spending on National Insurance pension payments goes to public sector workers, this means that almost 14% of the total should be allocated to public sector workers, in addition to the 23% shown. So around 37% of all taxpayer pension spending actually goes to the public sector workforce, which comprises only around 20% of workers.

Inclusion of DC assets as pension ‘obligations’ may be misleading: It seems strange that Defined Contribution schemes are included as ‘pension obligations’. The figure for these schemes only relates to their assets, but has no information on what actual ‘pension’ will be delivered over time. The best measure of defined contribution pension obligations would be to use annuities in payment or future annuitised income perhaps.