Public sector pension liability soars to £600bn

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The Independent Online

The government's liability for public sector pensions has risen more than 50 per cent to almost £600bn over the past two years, forcing the Treasury to choose between a rise in taxes or a cut in public spending if it is to continue honouring its financial commitments.

Research published yesterday by Watson Wyatt, the financial consultants, revealed that the Government's total pensions liability for workers in the public sector has increased by about £200bn since official estimates were last calculated in March 2002. This equates to an annual bill of about £12bn a year and rising, and does not take into account the recent swell in the public sector workforce, which will add to the total over time.

Stephen Yeo, at Watson Wyatt, said the Government's accounting techniques mean it has grossly underestimated the true liability it faces in the public sector. A change in the discount rate, which is to be introduced next year will bring the Government into line with the way the private sector calculates its own pension liabilities, but Mr Yeo said even this will not give a true reflection.

"The discount rate used by the private sector allows for the possibility of companies going bust," he said. "But the Government can't go bust, so it should use a lower rate. They are admitting that they have been under-accounting for it so far, but there's not been a lot of attention paid to these figures. Either there is going to have to be a rise in tax, or public spending is going to have to be cut."

Vince Cable, the Treasury spokesman for the Liberal Democrats, said the figures were "alarming", warning that the problem is already spiralling out of control in some sectors. "We must not get ourselves into a situation like the Italians, where they have let public sector pension liabilities get out of control," he said. "There are some sectors - particularly the fire service and the police - where pension liabilities can account for up to 20 per cent of the entire budget.

"The answer is not easy, and where people are near to retirement it would be wrong for the Government to renege on any pension commitments. But a long-term solution is needed. People may need to accept that they will have to work for longer, or receive less. It is something which all the major parties need to accept will be there for all governments."

The Treasury denied it was underestimating its liabilities. In a statement issued yesterday, it said: "We are on track to meet our fiscal rules in this cycle and the next. In line with internationally agreed accounting standards, measurement of public sector net debt does not include future liabilities. However pension spending is still projected to rise by less than 1 per cent of GDP over the next 50 years. These figures are included in the long-term projections published in the budget, which show that public finances are sustainable in the long term."

However, Nigel Waterson, the economics spokesman for the Conservative Party, said the Government should admit its failure. "This is damning evidence that the Government has got its sums wrong," he said. "The Chancellor should make a statement as to how they intend to fund these massive obligations, especially at a time when private sector pension schemes are under such pressure to be transparent and open."

Mr Yeo said that while the Government had calculated that its public sector pension liabilities were increasing at £30bn a year, he said he believed the true figure was around £46bn, almost 5 per cent of the UK's GDP. Including state pension liabilities, the Government pays out more than 6 per cent of GDP a year in pension payments, before accounting for council tax benefit, housing benefit and other benefits for the elderly.

Mr Yeo added that the figure had been calculated using the same rate that is used to discount nuclear decommissioning liabilities - a rate which the Government's actuary has conceded has a potential duration similar to that of pension liabilities. There are no other liabilities on the Government's accounts that have a duration which is anywhere near as long.