Public sector pensions liabilities could reduce by £1.2tn

Pardon the Interruption

This article is just an example of the content available to mallowstreet members.

On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.

All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.

Public sector pensions are the largest liability within government with more than £2.6tn in 2021-22, dwarfing borrowing costs and other financial liabilities, but the Treasury anticipates reductions of around £1tn for 2022-23 and £200bn in the 2023-24 accounts, respectively. The figures come after a recent report called for fully funding public sector schemes.

The UK’s whole of government accounts for 2021-22 – which consolidate the audited accounts of over 10,000 organisations across the UK public sector – show the public sector pensions liability stood at £2,639.1bn, or 42% of the UK’s total liabilities. In addition, the government estimates there is missing data to the tune of £67.4bn.   

The liability has been rising; it stood at £1,893.9bn three years earlier, going up by more than £700bn in three years. From 2020-21, it increased by 14.4%.  

However, as the net discount rate for 2022-23 has been set at 1.7%, up from 1.3%, the Treasury said it expects to see “a decrease of perhaps around £1tn... solely as a result of this change in the net discount rate”.   

For the 2023-24 accounts, when the discount rate has been set at 2.45%, it anticipates another fall of £200bn.   

The four largest unfunded pension schemes make up 86% of public sector pension liabilities: the National Health Service Pension Scheme, the Teachers’ Pension Scheme (England & Wales), the Cabinet Office Civil Superannuation, and the Armed Forces Pension Scheme.   

The largest, the NHS Pension Scheme, currently receives more income than it pays out, with the surplus cash going to the Treasury. For the other three large unfunded schemes, the picture looks different – payments exceed income, so parliament uses tax income to subsidise the schemes.  

Net public sector pension liabilities 2021-22  

 
Source: Treasury


In the past, the liability part of the balance sheet has increased at a faster rate than the assets. Like the anticipated fall in liabilities, the government also attributed this to discount rates: “In the last five years, a significant factor for the increase in liabilities has been changes in discount rates used to calculate major liabilities such as net public service pension liability and provisions.”  

Should public sector pensions be funded?  


The huge outstanding liabilities could raise questions about the sustainability of the public sector pensions system.  

However, independent commentator Toby Nangle recently said in a report about public sector pensions by thinktank New Financial that "despite alarmist calls to the contrary, reforms delivered since 2013 have left the system fiscally sustainable”, citing the Office for Budget Responsibility.  

The OBR expects unfunded public sector pensions spending in 2023-24 to total £7.9bn, around 0.7% of total public spending, which it said is equivalent to £276 per household.  

While acknowledging that the system is sustainable, Nangle calls for a shift towards a fully funded system, pointing to Canada as an example.

Doing so “would deliver a step change in their political sustainability and address key macroeconomic vulnerabilities in the UK economy, and they could save taxpayers hundreds of billions of pounds”, he argued. 

Financing public sector schemes on today’s market terms through the gilt market instead of the current system would save around £70bn over the next two decades, he claimed, while channelling new contributions into investments “could save taxpayers over £600bn”.  

Nangle acknowledged that a change to a funded model would ‘financialise’ public sector pensions, “generating huge fees for greedy bankers and asset managers”. He also admitted it would lead to even greater politicisation of pensions, “with bad investment decisions made for political ends” but believes these risks can be offset. 

The government is not currently planning to change the funding arrangement of the unfunded public service pension schemes. 
 
Moving from an unfunded to funded model would impact public sector net borrowing and public sector net debt. It could therefore affect the government’s ability to spend and potentially increase debt interest costs. 
 
Given lingering memories of the 2022 gilts panic in response to the announcement of unfunded tax cuts by former chancellor Kwasi Kwarteng, any future government will likely want to be careful not to spook its borrowing market again.  

Should unfunded public sector schemes move to a fully funded system? 

More from mallowstreet