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The Actuary The magazine of the Institute & Faculty of Actuaries

Danger – unexploded tax bombshell

Unfunded public sector pension liabilities are approximately £580bn, according to consultants Watson Wyatt. This is over 50% higher than the most recently published official estimate.

Stephen Yeo of 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.’

The most recent official estimate put the present value of the liabilities in all the unfunded public sector pension schemes at £380bn at 31 March 2002, based on a 3.5% real discount rate. However, changes in the way liabilities are calculated – bringing them more in line with the private sector – further accrual of benefits and improvements in mortality have significantly increased the present value of unfunded pension liabilities in the public sector over the past two years.

From 2005–06 the liabilities in the Whole of Government Accounts will be calculated using a discount rate of 2.8% real This is similar to the rate used in the private sector under accounting standard FRS17. Watson Wyatt estimates that this will add approximately £60bn to the present value of the liabilities. If, however, the discount rate was reduced to the same rate that will be used to discount nuclear decommissioning liabilities (which the government actuary notes have a potential duration not dissimilar to that of pension liabilities) of 2.2% real, the value of the liability would increase from £440bn to approximately £550bn. None of these figures takes account of the latest figures for the expected improvements in mortality which could add around 5% to all the above figures. If a 5% adjustment was appropriate, the total liability, using a discount rate of 2.2%, would be approximately £580bn.

Watson Wyatt has also been to the fore, together with the Pensions Policy Institute and the consultant Ros Altmann, in calling for a royal commission to be established with cross-party support to report on the future of retirement income in the United Kingdom.