26 October 2021
Summary
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- 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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