The UK's public sector pension liabilities have climbed to a huge 85 per cent of GDP, or £1,177bn, warns the British-North American Committee (BNAC).

The shocking percentage, which is three times as high as that in North America, equates to around £20,000 per person in the UK, as detailed in a BNAC publication, The need for transparency in public sector pensions.

The study used the International Public Sector Accounting Standards Board (IPSAB) Standard IPSAS25, which specifies that market sovereign/risk-free rates are the appropriate ones to use when valuing pension liabilities.

However, the study also showed that the UK Government, when reporting to Parliament and tax-payers, instead use interest rates in pension calculations that are higher than sovereign market-based interest rates, which actually reduces the liability calculations to £886bn, or 64 per cent of GDP.

The BNAC study showed concern that the Government is also recording the annual cost of the pensions it provides at less than half the cost than if the pension was priced at market rates, as detailed in IPSAS25. As a percentage of payroll, the UK Government's assumed interest rates are 18 per cent, whereas the market interest rates stand at 44 per cent.

Neil Record, chair of the BNAC's working group that drafted the study, commented: "Governments, when challenged on the huge forward liabilities involved with public sector pensions, are all too keen to respond that these can be 'comfortably met from future income from taxpayers'. The reality, however, is that the true costs of these large financial commitments are being hidden from present tax-payers and, even more worrying, are destined to pre-determine the use of monies raised from future taxpayers as yet unborn. Inevitably, this will reduce the amounts available for the running of public services in the future."

The study recommends that transparency of costs in public bodies' reports to taxpayers should improve, and that pension liabilities be valued at sovereign market interest rates. It also says consideration should be give to amortising or monetising net public pension liabilities.

The report can be found here.

- Pensions Age June 2009

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