UK Public Pension Liabilities on the Upswing

(July 13, 2011) — The UK’s total liability for funding public sector pensions has risen by 30% in two years to £1.13 trillion.

Public debt, meanwhile, is now nearly £2 trillion.

According to Treasury officials, the rise in pension liabilities is due to increasing life expectancy along with growth in public-sector wages and an increase in the number of employees.

Discount rates are also a factor. “Almost £260 billion of this increase had nothing to do with the prospective size of public-service pension payments,” Chairman Robert Chote told reporters in London today, according to Bloomberg. “Instead, it reflected a fall in the so-called discount rate used to convert the flow of future payments into an upfront sum. Next year the discount rate will rise, pushing the liability back down again.”

He added: “Nothing we say today should be construed as a call for a bigger fiscal tightening over the next four years. But an aging population does have fiscal costs.”

In May, a study released by Xafinity Corporate Solutions showed that UK-based corporate pensions have seen their collective deficit rise by close to 19% since February, with this deficit now totaling £430 billion. The deficit was just £58 billion in 2008, according to the company.

“This mark up of nigh on £100 billion illustrates two lessons. First, costs can swing by very large amounts over very short periods – in this case, just the second half of April,” said Hugh Creasy, director of the company, according to a company release. “Second, it puts into context the Office of National Statistics (ONS) recent news over employer contribution hikes. The ONS tell us that employers have paid in around £16 billion extra in contributions over the last two years, just one sixth of the interest rate hit.”

In the US, the Governmental Accounting Standards Board (GASB) has issued proposals to improve the way public pension funds report their liabilities. As investors have raised concerns that unrealistic expectations of investment returns have concealed the actual size of many unfunded pension obligations, the proposals aim to change the formula that schemes use to determine the value of their pensions.

Read “Pension Quandary: Valuing Liabilities” in the Summer issue of aiCIO Magazine: a discussion of public fund discount rates – and what rates are and are not appropriate to use when defining a plan’s liabilities, by Charles E.F. Millard, the former Director of the U.S. Pension Benefit Guaranty Corporation and now a Managing director leading Citigroup’s Pension relations team.