IEA - Public sector pensions cost £57bn per year more than is declared

27 Oct 2021 01:57 PM

The unreported annual cost of public sector pensions is £57bn – more than we spend on the police or the Ministry of Defence – according to a new report from the Institute of Economic Affairs.

Authored by IEA Chairman Neil Record, it reveals government has been running two “books of accounts,” leading to a general misunderstanding of pension costs in the public sector.

Because Members of Parliament, the general public and public sector workers are only told the discretionary cost, which is based on an arbitrary assumption about investment returns (i.e. a discretionary interest rate), not any market rate, they are in the dark on the true cost to the taxpayer.

The government declares the true cost, calculated according to the international standard for pension funds, only deep in its pensions accounts (as required by regulation). This makes the position understandable only by experts.

This approach has, in the view of the author, subverted the concept of independent reporting, and has brought UK public sector pension accounting into disrepute.

The difference between the discretionary and official costs is huge. By way of example, for the NHS Pension Fund, in 2020-21 the discretionary pension cost as a percentage of salary was 30.4 per cent, while the official cost was 62.2 per cent.

The effect on the labour market and intergenerational fairness is equally significant. These public sector pensions are not funded, and will therefore have to be paid by future generations of workers, through their taxes.

The author asks a number of questions of the government, including:

• Why does it consider it appropriate to encourage an increasingly wide gap between public and private sector pension provision?
• Why are Parliament and the public not able to compare, on a common basis, pensions on offer in the public and private sectors? Unless they can, no sensible debate about the future of public sector pensions can take place, nor will the labour market be able to operate transparently. If public sector workers are being paid (through their pensions) about 30 per cent more than is being reported, all public/private pay comparisons are hopelessly distorted.

Neil Record, IEA Chairman and author of The Great British Rake-Off, said: 

“The UK government employs 5.7m employees, and offers almost all of them very generous, heavily subsidised, pensions. For fairness; for the labour market to work properly; and for younger taxpayers to be accurately told how much they owe the old, it is vital that the government uses internationally agreed standards to report these pensions’ costs. It does not do so, pretending to the electorate and to Parliament that their pensions are worth about half their true value. The government is marking its own homework, and claiming that wrong answers are correct. This is morally and financially wrong, and must stop.”