UK's Brexit bill increases by almost £2bn 'overnight' due to surge in EU pension liabilities

The cost of the UK’s Brexit bill has increased by €2.05bn (£1.85bn) “overnight” due to a 21 per cent increase in EU officials' pension liabilities, according to the Centre for Brexit Studies.

The EU Commission's latest financial accounts showed a €17.203bn increase in the net liabilities of its defined benefit (DB) scheme, rising from €80.456bn in December 2018 to €97.659bn as of December 2019.

Of this, the UK is now expected to be responsible for €11.621bn compared to €9.574bn as at 31 December 2018, which will be paid over a number of years as pension payments fall due.

The surge in liabilities was primarily driven by a fall in discount rates, used to calculate the EU pension scheme’s future liabilities, to below zero, having hit -0.2 per cent in 2019.

The EU report explained: "This Pension Scheme of European Officials (PSEO) liability has increased mainly because of the actuarial loss from changes in financial assumptions caused by a sharp decrease in the nominal discount rate.

"Furthermore, as the nominal discount rate is adjusted for inflation to obtain the real discount rate, this year the real discount rate was for the first time negative – meaning that any given amount is worth more today than in the future: this significantly increases the size of the liability at year-end."

The report also noted that there had been an increase due to the annual interest cost, as well as actuarial losses "from experience".

The EU Commission's Pension Scheme Liability Bill has had over €30bn added to it since the 2016 Brexit referendum, when the UK would have been responsible for just £8bn, with 2018 alone bringing an increase of 10 per cent.

Commenting, Birmingham City Universities Centre for Brexit Studies visiting professor, John Clancy, noted that a rate of -0.2 per cent was “unprecedented” and had added an extra £17.203bn to liabilities “overnight”.

He emphasised that under the Withdrawal Treaty, the UK is "pretty much committed" to paying the additional costs, unless it is bought back into Brexit deal negotiations.

However, Clancy argued that the particular method utilised by the EU commission for calculating pensions liability is “simply not sustainable”, stating that using discount rates based on euro bonds is “actually pointless”.

He said that these bonds emerge from a market “rendered completely artificial” by “continual waves” of quantitative easing by the European Central Bank, stressing that a further wave could lead to further increases to the Divorce Bill of as much as €3bn.

Clancy has urged the UK government to challenge the calculations, and propose a different non-discount-rate method of calculating scheme’s liabilities.

"They could also bring a case under the Withdrawal Treaty for arbitration by the panels set up in it, and ultimately the European Court of Justice," he added.

More broadly, however, Clancy argued that the UK government should not be paying anything at all for future pension liabilities.

He stated: “In any event the UK should be given credit for the over payments it made for decades into officials’ pension pots, when it should had started only paying for officials pensions in full once their entire career had occurred since the UK joined the E.U.”

He also noted however, that in the event of a no-deal Brexit, the pension liabilities could be “a much more difficult ask for the EU to sustain”, and would likely be the “first on the list” if looking to reduce the Divorce Bill.

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