Long-term cost of public sector pensions set to drop, says OBR

12 Jul 12
Government reforms will cut the cost of public sector pensions by 40% over the next 50 years, according to forecasts published by the Office of Budget Responsibility today.
By Vivienne Russell | 12 July 2012

Government reforms will cut the cost of public sector pensions by 40% over the next 50 years, according to forecasts published by the Office of Budget Responsibility today.


In its second Fiscal sustainability report, the OBR took a long-term view of the public finances and the likely impact of demographic changes.

It found that gross public service pension payments are set to fall from 2.2% of gross domestic product in 2016/17 to 1.3% of GDP in 2061/62. This compares to a predicted fall of 25% (from 2% to 1.5% of GDP) in last year’s report.

Net costs of public service pensions, which take account of contributions as well as payments, are projected to fall from 1.7% of GDP to 0.9% over the same period. The OBR said the decision to uprate public sector pension payments in line with the lower CPI measure of inflation, rather than the higher RPI index accounted for 0.4 percentage points of the difference.

The OBR’s report drew heavily on the information included in Whole of Government Accounts for 2010/11, which were also published in unaudited and summary form by the Treasury today.

According to WGA, the net present value for future public service pensions payments was £960bn (equivalent to 63.8% of gross domestic product) at the end of March 2011. This is £175bn lower than was reported at the end of March 2010 in last year’s Fiscal sustainability report. Again, the OBR said the bulk of the difference was due to the decision to shift pension indexing from RPI to CPI.

Commenting on the OBR’s conclusions, Chief Secretary to the Treasury Danny Alexander said: ‘The government’s reforms will bring total spending on public service pensions in line with the long run average over the last 40 years. This will save 40% of net expenditure by 2061/62, so freeing up funding for other services. The Treasury estimates that this represents around £430bn of savings in current GDP terms over the next 50 years.’

He added that the OBR’s predictions provided further proof that public sector pension deals are ‘good for taxpayers’ as well as public sector workers.

Overall, the OBR predicted that the demands of an ageing population were likely to put the public finances under pressure over the longer term, with more resources having to be spent on pensions and healthcare. Without tax rises or spending cuts to offset this pressure, budget deficits would widen and ‘eventually put pubic sector net debt on an unsustainable upward trajectory’.

WGA provides a snapshot of the government’s total assets and liabilities as of March 31 2011. The Treasury said the accounts formed part of the government’s drive for greater transparency and openness.

CIPFA welcomed the publication of WGA. Policy director Ian Carruthers said: 'This maintains the momentum from last year, and through including comparative data provides increased support for the OBR's report on long term fiscal sustainability.

'The summary underlines the importance of the overview WGA provides on the impact of policy decisions on the public finances by showing how indexing public sector employee pensions using the Consumer Price Index rather than the Retail Price Index reduced the deficit for the year by £126bn. However, to allow WGA to deliver its full potential fiscal policy role the Treasury needs to continue to work towards earlier publication of the complete audited accounts.'

Karen Sanderson, deputy director of the Treasury’s financial management and reporting group, last week told the CIPFA conference in Liverpool that the team was working hard towards ‘faster closing’.

Last year’s WGA was qualified by the National Audit Office on five counts.


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