UK Public Pensions Face Significant Liability Increase

March 12, 2010 ( - The amount of money paid as pensions to workers in the public sector could more than triple in the next 50 years, the UK's National Audit Office suggests.

According to BBC News, the NAO issued a report warning unfunded public sector schemes they will pay out £79 billion by 2060, compared with £25 billion this year. The report says the rise will be due to increased longevity and increases in the real earnings of public sector workers.

The NAO also warns that annual pension payments will be much higher if the public sector workforce increases. “The Treasury has not assessed the impact of different assumptions about the size of the public service workforce, despite it being a critical driver of pension costs,” the report said, according to the news report.

The NAO’s estimate that cash payments to pensioners will rise from an estimated £25.4 billion in 2009-10 to £79.1 billion in 2059-60 is based on figures supplied by the Government Actuary’s department. As a proportion of the economy’s total economic output, the Treasury estimates that these payments will rise from 1.7% now to 1.9% by 2018-19, before eventually falling back to 1.7% by 2059-60.

As well as assuming that women will live on average to 94.7 and men to 92.3, and that average public sector earnings will grow by 2% a year above inflation, the NAO also assumed in its calculations that the public sector workforce will not grow, despite a predicted 20% growth in the population over that time.

BBC News reports that the NAO looked at the costs of the so-called “pay as you go” public sector pension schemes, in which pensioners are paid out of taxation rather than the proceeds of an underlying investment fund. The biggest four schemes of this type are those of the civil service, the armed forces, and the NHS and teachers schemes for England and Wales, which account for 75% of all payments from unfunded public sector schemes.

Last March the schemes covered 6.5 million people – 2.75 million staff, 1.59 million former employees who had not yet retired, and 2.13 million pensioners. The NAO found that total payments to pensioners made by those schemes rose by 38%, from £14 billion in 1999-2000 to £19.3 billion in 2008-09.

The main reason for the increase was the 23% rise in the number of pensioners during that time as more people retired. Employee contributions also rose strongly over the same period, by 56% to £4.4 billion, thanks to higher contribution rates and more staff making contributions.

According to the news report, the NAO will publish a second report later this year which will look at the impact of recent changes to the pension schemes and put forward recommendations. These involve the assumption that the cost of higher contributions in the future will fall on employees, with two-thirds of the higher costs being absorbed by lower payments to pensioners and one-third being paid for by higher contributions, the news report said.

The NAO’s report can be downloaded from here.