Pension liabilities: the full story?

13 Jul 11
Nigel Keogh

Publication today of the Whole of Government Accounts provides useful information on many areas including public sector pensions. But more explanation of the context would be welcome

Ten years in the making, and at times the forgotten sibling of the UK government’s move from cash-based to resource-based accounting, the first public sight of Whole of Government Accounts is a welcome addition to the transparency of public sector financial reporting.

However, it is somewhat disappointing that after many years of hard work the first public presentation of WGA is a cut-down, unaudited summary of the fuller set of accounts.

What we do have in the document published today is a useful consolidation into one place of a range of data on public sector pension liabilities. What is missing is some kind of narrative context to the numbers provided.

There is an ‘illusion of certainty’ created when pensions liabilities are reduced to a single number – in today’s case the focus on the figure of £1.13trn.

But enhanced sensitivity analysis could and should be used to better convey information about the range of outcomes that can result from the timing, amount and timespan of future pension payments. This is particularly the case when certain variables (primarily the discount rate) can have such a massive impact on how that ‘single number’ is arrived at.

For example at the point at which this snapshot of public sector pension liabilities was taken (31 March 2010), the prevailing ‘good quality corporate bond rate’ used to discount future liabilities stood at 1.8% (net of inflation) for central government pension funds, down from 3.2% the previous year.

This change alone accounts for an ‘increase’ in liabilities of £288bn, compared to the increase in liabilities arising from new pension entitlements earned in the year of £27.6bn. Roll forward 12 months to March 2011 and the discount rate has risen to 2.9%, which when combined with the effects of the switch from RPI-based indexation to a CPI base, will see reported liabilities reduce by somewhere in the region of £250-300bn.

What is also missing from this assessment of public sector pensions liabilities is any indication of timeframe over which these liabilities will fall due, and therefore what the implications may be for the short- and long-term public finances.

Unlike the liabilities for public sector debt which will mature/be renewed over the next 50 years, the liabilities disclosed here will result in payments stretched over a period of 80 years plus. They constitute something in the region of 1.9%, falling to 1.4%, of GDP over the next 50 years according to the latest reports from the National Audit Office and the Public Accounts Committee.

The data released today offer just a taste of how much can be gleaned from Whole of Government Accounts and with the publication of the full, audited set of accounts scheduled for later this year, this is a positive step forward in UK public sector financial reporting.

Nigel Keogh is CIPFA’s technical manager for pensions

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