Peter Tompkins: Public sector pensions cost a lot more than people think

Peter Tompkins is a Member of the Council of the Institute of Actuaries and a former Chairman of its Pensions Board. He is the chairman of the non-government independent Public Sector Pensions Commission, which is publishing its report this morning.

Public sector pensions cost a lot more than people think: that is one of the main conclusions of a six-month study carried out by the independent Public Sector Pensions Commission*, which I chair.  Our group had the support of a number of policy bodies like the Institute of Economic Affairs, the Institute of Directors and Policy Exchange.

When it comes to pensions, figures are everywhere, confusing even seasoned experts like me.  Private sector pensions are valued regularly – and have shown some shocking levels of deficit in recent times.  The deficit is the difference between the funds they have invested and the liabilities to pay pensions in future – discounted to the present time at the rate of interest that they expect to earn on their investments.  One reason why pension deficits abound is that returns on investments have been steadily falling but the main one is that people are living longer and longer, far more than most actuaries expected ten or twenty years ago. 

In the public sector, you may expect, the sums might be different.  As these schemes are “pay as you go” where pensions are paid with today’s pension contributions, there are generally no funds put away and invested, so you would not expect the future payments to be discounted at the rate of interest they can earn on the funds they don’t have.  But if you thought that you would be wrong.  The Government does still discount future payments at a rate of discount 3.5 per cent higher than inflation (similar to what private sector funded schemes do), even though its own promises to pay inflation-linked payments to government bondholders now earn only 0.8% above inflation.