ADMINISTRATION
Spending on public sector pensions inches up Value (£bn)
Office for Budget Responsibility forecasts, which estimate the net of payments to members less contributions from members, show government expenditure on the rise in real and relative terms
Per cent of GDP
Forecast (£bn) 20
Per cent of GDP forecast 0.8
That looks politically impossible because it would trigger a huge increase in
contributions required Ian Neale, Aries Insight
15 0.6
a can of worms that needs to be dealt with at some point.” Despite having an impact on employer
£bn 10 0.4 %
contributions, the Scape rate does not affect scheme members’ payments, according to Neil Walsh, pensions officer at union Prospect. Changes in this calculation are “specifically
5 0.2
excluded from the cost-cap mechanism that is designed to maintain the costs of the benefits being accrued at an agreed level over time”, he explains. Mr Walsh argues that the employer
0 0
contributions are an “accounting mechanism designed to impose a discipline of recognising the cost of accruing pensions on employers and do not actually affect net payments into or out of the schemes”.
Source: Office for Budget Responsibility For example, Pensions Expert reported in
January that the survival of some state schools, colleges, universities and independent schools is threatened by the £1.1bn rise in the employers’ contribution to the Teachers’ Pension Scheme from September 1 2019.
Benefit structure changes? Mr Warden notes that if the GDP growth does not happen in the later years, “someone will have to pay, which ultimately will be the taxpayers, because there aren’t any assets in these pension schemes”. He adds that it is difficult to imagine the Scape
rate rising anytime soon. “You might expect some further reductions if you believe in OBR forecasts, which puts more pressure on the schemes,” Mr Warden says. He adds: “You would think that there is some
kind of breaking point; is it sustainable? Can we keep putting pressure on employer costs? “The most sensible thing would be to have another look at the benefit structure, which would open a can of worms, but maybe this is
CURRENTLY SITS AT 2.4 PER CENT
ABOVE THE CONSUMER PRICE INDEX
THE SCAPE DISCOUNT RATE
Increasingly affordable He stresses that there is a relationship between affordability and the Scape discount rate and hence estimated liabilities, but it is not directly causal. “If projected real economic growth falls, then
a given level of future pension payments will be relatively less affordable and the Scape discount rate will also be lower, and hence estimated liabilities will be higher,” Mr Walsh notes. He adds that affordability and the estimated
liabilities will both have been impacted by the changes to projected economic growth and not each other. Mr Walsh argues that the future affordability of
the schemes depends on two main factors: the amount of pension benefits paid out each year (net of the contributions from members), and the ability of the economy at the time to bear the amount being paid out (that is, the relative size of the economy). The OBR’s latest report, published in July 2018,
projects the net cost of these schemes to fall from 1.7 per cent of GDP in 2022-23 to 1 per cent in 2067-68. “Payments from these schemes are projected
to comprise a smaller proportion of the size of the economy over time and hence become increasingly affordable,” Mr Walsh concludes.
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