From the TUC

Treasury’s attack on public sector pension costs collapses

13 Jul 2011, by in Pensions & Investment, Public services

Two weeks ago on consecutive mornings on the BBC’s Today programme government ministers were unable to argue that public service pensions were unaffordable and unsustainable.

This is because they had no answer to the projections accepted by the National Audit Office, the Office for Budget Responsibility and John Hutton’s report that the share of GDP taken by gross public service pension payments is due to fall from 1.9% to 1.4%.

Today they have tried to fight back by spinning new projections of the costs of pension liabilities in today’s Whole of Government Accounts (WGA). But the Office for Budget Responsibility’s new report shows that this spin is highly misleading.

Although the WGA figures were not published until this morning, this is how the Press Association reported them yesterday evening:

The taxpayer’s total liability for funding public sector pensions has hit GBP1.1 trillion, according to new official figures. The scale of the obligations will be revealed for the first time in material being published by the Treasury.

The Whole of Government Accounts has been billed as giving a fresh insight into the public finances, laying the situation out as a listed company would. Ministers are expected to use the information to reinforce their argument that pensions must be reformed, despite furious protests by public sector workers.

The accounts for 2009-10 will show that the pension liabilities stood at GBP1.1 trillion, according to coalition sources (our emphasis). That is significantly higher than the only other estimate of GBP770 billion given in 2008’s Pre-Budget Report – although it is not clear if the figures were calculated in the same way.

This is a classic big scary number. For most people a trillion is a completely inconceivable amount. It has long been a favourite of the IoD, the TaxPayers’ Alliance and all the other right-wing pensions attack dogs.

But it is a largely meaningless number. It is an attempt to express future liabilities to pay public sector pensions – a commitment that goes decades into the future – as if it were a bill that had to be paid all at once today.

That figure depends to a very large extent on how you choose to express tomorrow’s bills in today’s money.  It particularly depends on what discount rate you use (the special interest rate used to work out how much money put away today would be worth in the future when the bill has to be paid.) These assumptions have more effect on the figure than real world changes such as unexpected increases in longevity among public sector pensioners.

Because the discount rate changes as corporate bond yields move the National Audit Office, the OBR and John Hutton’s report all say that this measure is not a helpful indication of future affordability. Even a small difference in the discount rate can produce a big change in the liability because pensions commitments go so far into the future.

Here is John Hutton on liability figures:

4.11 The accrued liability figure as at 31 March 2009 was lower than the 31 March 2008 figure primarily because a higher discount rate was used (which reduces accrued liabilities as it places a lower value on pension payments in the future). The following year the reverse was true.

4.12 The changes in the discount rate assumptions over this period did not result from adjustments to the assumed security or generosity of public service pensions. Instead, as they were linked to AA corporate bond yields they reflected the change in assumed risk of corporate defaults during and after the credit crunch. A change of this kind in bond yields has no implications for the actual cost of providing public service pensions, so such estimates of accrued liabilities need to be used with caution.”

Here is the National Audit Office:

Changes in the discount rate lead to large fluctuations in the size of pension liabilities, but have no effect on projected pension payments. For example, the discount rate increased by 0.7% in the year to 31 March 2009 for the four largest schemes. There were no other changes that year to key financial assumptions underlying liabilities, but the discount rate change alone reduced the total liability across all four schemes (teachers, health, civil service, armed forces) by approximately £73 billion.”

So if these figures were dismissed in the past, what about those issued today?

Today the Office for Budget Responsibility publish their Fiscal Sustainability Report which attempts to look into long term public spending commitments.

Here are two key quotes taken from the executive summary:

the net present value of future public sector pension payments arising from past employment was £1,133 billion or 78.7% of GDP at the end of March 2010. This was £331 billion higher than a year earlier, but almost £260 billion of this increase had nothing to do with changes in the size of prospective pension payments. Instead, it reflected a fall in the discount rate used to convert these future payments into a one-off sum. The discount rate is linked to the real yield on high-quality corporate bonds, which fell over the year.”

The second needs a bit of context. One theme of the report is that our ageing society carries a bill, and that the future costs of state pensions, care and other age-related spending is due to increase. (So watch out for the government trying to further speed up state pension increases in future!).

But they then say this about public sector pensions:

These increases are partially offset by a fall (our emphasis) in gross public service pension payments from 2% of GDP in 2015-16 to 1.4% in 2060-61. These costs fall as a result of the decision to up-rate pensions in payment by CPI rather than RPI, the current pay freeze and planned workforce reductions. These projections are very similar to those in the final report of the Independent Public Service Pensions Commission, chaired by Lord Hutton. We have not made any assumptions about the implementation of Lord Hutton’s recommendations.”

So here is further confirmation that public sector pensions are neither unaffordable, unsustainable or getting more expensive. Instead they are being cut to pay for deficit reduction in the short-term and to take up an unfair role in meeting the general costs of an ageing society in the long term.

3 Responses to Treasury’s attack on public sector pension costs collapses

  1. Bill Kruse
    Jul 13th 2011, 12:13 pm

    Good, but isn’t it about time the government were stopped in their tracks every time they suggest the country can’t afford the current benefits bill which is spoken of in similarly misleading terms?


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