18 November 2005
Treasury officials have dismissed as 'erroneous' a new study claiming that public sector pension liabilities have soared to more than £800bn – greater than the UK's national debt.
A report published by the Institute of Economic Affairs on November 14 says that the burden of future public sector pensions for millions of workers has reached £817bn – around £307bn higher than the Treasury's estimate.
IEA report author Neil Record, a former Bank of England economist, claims that the Treasury's 'unrealistic' estimates are 'far too optimistic because they do not take proper account of trends in mortality, likely future public sector pay increases and market interest rates'.
Record also calculates that the average annual cost of public sector pension benefits as a proportion of employees' salaries do not reflect the amounts being earmarked for pension pots.
He claims this could hinder government attempts to ease the cost of public sector pensions and prevent a future retirement funding crisis across the sector.
Ministers have proposed switching some public sector schemes from payments based on employees' final salary to those based on average salary, while new public employees will be subject to a five-year increase in pension age – to 65 – from 2006.
But Record said: 'Only when the true cost of public sector pensions is made transparent can we have a serious discussion about policy alternatives.'
However, a Treasury spokesman told Public Finance that the IEA report 'makes a number of methodological assumptions that we would not agree with', adding that current public pension payments eat up just 1.5% of Britain's gross domestic product annually.
'For example, the IEA study assumes that the average civil servant's career lasts 40 years, but the actual figure is closer to 20 years, which would substantially reduce the costs involved in calculating future pension entitlements.'
The most important point, the Treasury claimed, is that the government can afford to pay the cash costs of pensions liabilities each year.
'The government publishes a detailed projection of these costs in the Long-term public finance report. This has consistently shown that all the government's long-term liabilities are fully affordable,' the spokesman said.
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