£1 trillion public sector pension black hole demands attention

The government is sending out a mixed message on public sector pension reform, but with unfunded pension liabilities estimated at £1 trillion, it is clear that action needs to be taken.

Prime minister Gordon Brown told reporters last week that the government would stick to its existing plans on unfunded NHS pensions, yet earlier in the week chancellor Alistair Darling did not rule out public sector pension cuts.

Expanding liabilities

Public sector liabilities have ballooned in recent years and the picture is likely to get worse due to expected cuts in public sector jobs.

Since 2007, public sector employee numbers have risen 16% from 5.17 million to 6.02 million, but expected cuts in public sector jobs will reduce actual and deemed contributions, reducing the funding of existing pension promises.

Funded schemes used by local authorities carry much smaller liabilities, but there is still concern that this liability will grow, especially if they lose contributing members.

Meanwhile, the biggest unfunded schemes, like those for NHS staff and teachers, will be the most heavily protected, but they will still need to limit their huge liabilities.

‘The problem is that the schemes have to fulfil the obligations they have already made but don’t own any assets,’ says David Robbins, senior consultant at Towers Watson.

‘For funded schemes future costs can be controlled by buying bulk annuities and using tools like longevity swaps. But it is just not possible for the government to spend £1 trillion buying out unfunded liabilities.’

The Pension Corporation route