21% increase in govt pension liabilities prompts future payment concerns

Government pension liabilities increased by 21 per cent between 2015 and 2018, figures from the Office for National Statistics have revealed, prompting concerns amongst industry experts as to the future burden that these pension promises may represent.

The ONS data also revealed that the accrued-to-date gross pension liabilities of UK pension providers in relation to workplace pensions and state pensions grew to £8.9trn at the end of 2018, compared to £7.6trn at the end of 2015.

Government pension liabilities increased by 21 per cent since 2015, standing at £6.4trn in 2018, which was attributed largely due to a change in the discount rate assumption from 5 per cent to 4 per cent, in line with international requirements.

The pension liabilities of central and local government included £4.8trn in state pension entitlements, equivalent to 224 per cent of 2018’s gross domestic product (GDP).

This was alongside £1.2trn for unfunded defined benefit (DB) workplace pension entitlements for public sector employees, equal to 55 per cent of GDP, and £413bn, or 19 per cent of GDP, for funded DB workplace pension entitlements for public sector employees.

Meanwhile, non-government pension liabilities for private sector employees rose from £2.3trn in 2015 to £2.6trn in 2018, comprising of £2.2trn in DB and hybrid workplace pension entitlements, equal to 103 per cent of GDP, and £347bn in defined contribution workplace pension entitlements, or 16 per cent of GDP.

Commenting on the data, LCP partner, Steve Webb explained that whilst the reduction in discount rate more than accounts for the increase in state pension, it also says something as to future ability to pay pension promises, warning that the burden of paying future state pensions may be tougher than expected.

He stated: “The state pension system and the pensions of nurses, teachers and civil servants are based on a set of promises which tomorrow’s taxpayers will have to honour.

“The affordability of these massive promises depends on the size of the UK economy in the future.

“What these figures are telling us is that we are now less optimistic about the size of the UK economy which means that the burden of meeting these pension promises is much greater than previously thought.

“A combination of unfunded pension promises plus rising costs of an ageing population for health and care means that future generations will be facing a hefty bill for the promises we are making today”.

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