ADMINISTRATION


Public sector schemesface £102bngapinnext10years


By Maria Espadinha


Experts have calculated that unfunded public sector pension schemes could be hit with a shortfall of up to £102bn in the next 10 years if the government’s GDP expectations are not achieved


T


he sustainability of unfunded public sector pension schemes has been called into question by actuaries, with calculations pointing to a shortfall of £102bn in the next 10 years.


Despite the government announcing last year


that it would be reducing the Superannuation Contributions Adjusted for Past Experience discount rate – used to convert a future stream of pension benefits into a single figure in today’s terms – by 0.4 percentage points, this is not enough, several specialists have told Pensions Expert. They argue that future taxpayers will be called


on to plug the gap to pay current pension promises, as the calculations used by the government for these pension schemes are more optimistic than the current short-term gross domestic product estimates for the UK. Allan Martin, a director at trusteeship and


advisory consultancy ACMCA, explains that this rate “affects contributions, benefits, retirement age, commutation terms and divorce shares for more than 5m voters”. GDP growth is used to represent a fair


assessment of the government’s income. The Scape discount rate currently sits at 2.4


per cent above the consumer price index. It is based on the Office for Budget Responsibility’s assumption of real GDP growth for the period 2016-50 of 2.2 per cent. This figure is adjusted to 2.4 per cent via the


GDP deflator (+2.2 per cent) and CPI estimate (-2 per cent). However, the short-term GDP growth


estimate for the next 10 years from the OBR sits at 1.6 per cent. By multiplying the difference between the two


rates with the current unfunded public sector pension liability, which now totals around £1.74tn, Mr Martin found a shortfall of £102bn in these schemes. He says: “Unless GDP expectations are


achieved, not reducing benefits or increasing contributions will guarantee pressure on government budgets, which will in turn require higher taxation or reduced services.”


32 A Treasury spokesperson says: “Benefits


earned today will be paid out over many decades. That is why it is appropriate for the discount rate, which is known as Scape, to be set in line with the long-term OBR growth forecast. Adjustments stop shortfalls building up as employers pay out benefits to today’s beneficiaries.”


‘A game of pass the parcel’ Richard Warden, actuary and partner at consultancy Hymans Robertson, explains that the Scape rate is used to calculate the amount of contributions that need to be paid in theory to cover the cost of the pension schemes. He says: “Crucially, because these are unfunded schemes, there is no investment income here, so they are entirely reliant on future taxpayers paying ultimately for it [and] employers and employees paying towards it.” David Robbins, senior consultant at Willis


Towers Watson, notes that in a pay-as-you-earn system, employer contributions are “just a game of pass the parcel with taxpayers’ money”. He says that “they involve Treasury giving a department a budget and then taking some of it back again”. Mr Robbins adds: “Under a sensible spending


review negotiation, the budget awarded ought to allow for what will be coming back, given that they want enough to be left over to deliver the targeted amount of services.” Bringing down the discount rate further would


mean that public sector employers would have to raise their pension contributions to make up the difference. Ian Neale, director at pensions specialist Aries


Insight, who has analysed Mr Martin’s figures, says that the numbers suggest the Scape rate should be further reduced. “But that looks politically impossible because it would trigger a huge increase in contributions required,” he notes. The last change to the calculation, announced


by the Treasury in September 2018 – from 2.8 per cent to 2.4 per cent to take into account OBR’s lower long-term growth forecasts – is already taking its toll.


Not reducing benefits or increasing contributions will guarantee


pressure on government budgets, which will in turn require higher


taxation or reduced services Allan Martin, ACMCA


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48