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Money managers under the microscope

Public pensions: the billion/trillion/TBC issue for the new fiscal watchdog

May 17, 2010

 The moment of truth has come: the new government is going to outline £6 billion of spending cuts and to make sure it will stick to deficit tackling measures, it has appointed a new fiscal watchdog, the Office for Budget Responsibility (OBR).

As part of its remit, the new agency will also ”have a role in making an independent assessment of the public sector balance sheet including analysing the cost of ageing, public service pensions,” the Treasury says.

Public employees retain a pension deal that entitles them to a portion of their wages when they retire, a right that private sector workers have mostly lost. This disparity has been described as ”pension aristocracy”. But while aristocracy is defined under strict parameters, you would need a title for starters, when it comes to finding out how much it costs to pay for public pension, covering the NHS and the police for instance, there are different schools of thoughts.

There is the official line: the cost of the public pension obligation over a year is about £20 billion a year or 20 percent of pay-roll, while fund manager Neil Record, who has spent years researching the issue, reckons it costs double  that.

Record also reckons that as of March 31, the outstanding public pension cost will be about £1.3 trillion, versus what the government is likely to put at £793 billion using the interest rates of 3.2 percent above inflation used last year.

Finding an investment yielding 3.2 percent above inflation is a tall order, according to Record. But using what he sees as a more realistic interest rate of 0.75 percent — the yield offered by a 20-year index-linked gilt — adds a further £500 billion to outstanding public pension liabilities.

In other words, optimistically the public pensions bill is about £ 800 billion but a more conservative estimate may add an extra £500 billion. The OBR will  shed some light on the point, putting finally a figure to the whole pension matter. Until then we can take comfort in the £6 billion  spending cuts, which — painful as they may be — have been quantified.

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