Inter-generational fairness is a hot topic at the moment, and a summer Budget that maintains the triple lock for pensions whilst restricting Housing Benefit entitlement for young people gives the issue even more prominence. So it is important that governments are transparent about the true costs of the services and benefits they provide, and how they are being funded.
According to the Centre for Policy Studies’ Michael Johnson (a speaker at CIPFA’s recent Annual Conference), “there is little evidence to suggest that the baby boomers are willing to halt the torrent of unfunded promises that they are making to themselves.” In his paper Who will care for Generation Y? Johnson makes six proposals to improve transparency and promote inter-generational fairness.
The first of these proposals is that “the UK’s Whole of Government Accounts (WGA) balance sheet should include a liability to represent future State Pension payments, based upon a realistic expectation of the future cash outflow, discounted using the UK gilt yield curve.”
If this proposal was adopted, the impact on the WGA would be dramatic. The UK government doesn’t publish an estimate of its future obligations for state pensions, but in his paper Johnson estimates it to be approximately £4 trillion (more than double the net liability of £1.85 trillion reported in the latest WGA covering the year to 31 March 2014).
Why does the WGA balance sheet not include a liability for future state pension benefits? Because, as it explains in the WGA, the government considers that the obligation for government arises in the year of payment. In technical terms, there is no present obligation in respect of payments that will fall due in future. This view as to when an obligation arises is held by a number of governments, although some of them (for example the United States) do publish their estimates of future pension obligations in their financial statements for transparency reasons.
Others, such as Johnson, would contest this view. Indeed, there a range of views as to when an obligation for state pension benefits arises. And although state pensions are the most obvious example, similar issues arise with other social benefits.
It is in this context that the International Public Sector Accounting Standards Board (IPSASB) has published its recent consultation paper, Recognition and Measurement of Social Benefits. This paper – the first stage in developing an accounting standard that is likely to influence UK public sector accounting – explores a range of views as to when an obligation for social benefits might arise. The IPSASB is seeking stakeholders’ views about the appropriate accounting treatment for social benefits, and users’ information needs – or transparency – is an important factor that needs to be taken into account.
Not everyone thinks it is helpful to include liabilities for social benefits in the balance sheet. Critics of this approach argue that it does not provide relevant information, as future payments are included, but future revenue (specifically taxation) is not.
Such concerns may be addressed by one of the other options being considered by the IPSASB. As well as the traditional “obligating event” approach, the consultation paper includes two other approaches. One of these – the insurance approach – considers both payments and revenue when assessing the liability.
This insurance approach could only be used for benefits funded – at least in part – through contributions. But for these schemes, it negates the criticism that future payments are included, but future revenue is not. Is this helpful? Again, the IPSASB is seeking stakeholders’ views.
A consultation paper about the recognition and measurement of social benefits may seem like something that is best left to the techies to discuss – and indeed there are parts of the paper that do explore technical issues in detail.
But the debate is about more than making sure the numbers in the balance sheet are correct. It is about having the best information available when discussing policy issues – such as inter-generational fairness. The financial statements may not include all the information needed – something the IPSASB recognises – but they can make a significant contribution.
This consultation paper is your chance to shape the future of accounting for social benefits – and the contribution the financial statements can make to future policy debates.
Recognition and Measurement of Social Benefits can be downloaded from http://www.ifac.org/publications-resources/recognition-and-measurement-social-benefits.
