How government has misled Parliament and the British people on public sector pensions

Research

How government has misled Parliament and the British people on public sector pensions

Neil Record

26 October 2021

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https://iea.org.uk/wp-content/uploads/2021/10/DP103_Great-British-Rake-Off_web.pdf

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Summary

The government is misleading Parliament and the public over the cost to the taxpayer of public sector pensions. This takes the form of the government reporting its pensions cost in a different way from that required by pension regulations in the private sector.

A discretionary cost method of calculation is used to determine what public sector employers and employees pay each year for their pensions, and is the ‘generally understood’ cost. It is based on an (arbitrary) assumption about investment returns (i.e. an interest rate of the government’s choosing).

The official cost method is based on IAS19 – the measure approved by the International Accounting Standards Board. The official cost method is the one which UK regulation requires for private sector pensions.

For conformity with UK pensions law, and comparability with private sector pensions, therefore, public sector pensions should be accounted for at the official cost.

Members of Parliament, the general public, and indeed public sector workers, are only told the discretionary cost.

The government declares the official cost method, but only deep in its pensions accounts (as required by regulation). As a result, the situation is understandable only by experts.

The difference between the two costs is huge. As an example, for the NHS Pension Fund, in 2020-21 the discretionary pension cost as a percentage of salary was 30.4%, and the official cost, 62.2%.

This is a very important issue indeed, as the ‘unreported’ cost (the difference between the official cost and the discretionary cost) is enormous.

I estimate the unreported annual cost at £57 billion in 2020-21, or approximately 30% of the public sector payroll.

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Neil Record

Chairman of IEA Board

Neil Record was elected as Chairman of the IEA Board in March 2015. Neil is also Chairman of Record plc, a listed specialist currency asset manager. He was educated at Balliol College, Oxford, and University College London, from where he holds an MSc in Economics (with distinction). His first job was as an economist at the Bank of England; this was followed by a stint in industry. In 1983, he founded Record, the firm he still chairs. He has lectured on Investment Management at Cambridge University, and is author of the first book on specialist currency management within an investment context: Currency Overlay (John Wiley & Sons, 2003). Neil has been a prime mover in attempting to improve transparency in public sector pensions in the UK, and is author or co-author of four papers on this topic, including Sir Humphrey’s Legacy (2006) published by the IEA. He is a member of the Investment Committee and Visiting Fellow of Nuffield College, Oxford.