The Treasury is poised to understate a huge potential pensions liability by several hundred billion pounds as it prepares to publish Whole of Government Accounts for the first time, according to Tory shadow chief secretary Howard Flight.
Link: FRS 17 report
Flight accused ministers of planning to use a real discount rate of 3.5% for long term gilts when the average actual yield has been 2.5%.
The effect will be to value the unfunded pensions liability under FRS 17 at £380bn when the actual average discount rate would result in a valuation of around £500bn.
Flight spoke out after chief secretary Paul Boateng upped the pensions liability at 31 March 2002 to £380bn, £30bn more than a figure given earlier by financial secretary Ruth Kelly.
Flight based his claim on further information from Boateng and Kelly in reply to formal written questions in the Commons about the pensions liability.
Kelly said the public service pension liabilities were estimated using the 3.5% discount rate according to advice from the government actuary’s department ‘based on the expected yield on long-term gilts’.
She said private sector pension schemes are required to use a discount rate equal to the yield on an AA-rated bond of equivalent term to the liabilities – adding that one study suggested rates clustered round 5.6%.
The pensions liability increases as the discount rate decreases.
Flight said: ‘We have a private pensions sector taxed at £5bn a year – nearly £40bn compound since ACT recovery ended – and we are going to have to cough up to fund public sector schemes.’
He said he wanted to highlight the ‘immorality and injustice’ of the position, since taxpayers, including many with private pensions, may have to pay unquantifiably higher taxes to finance the public sector pensions liability, increasing as a result of the enlargement of the public sector work force.
Flight said the government have two options: to face public sector pensioners with the same problems as those in the private sector suffering disimprovements to schemes, such as the loss of inflation-proofing; or, since public schemes work on a pay-as-you-go basis, impose large increases on existing contributors.