The UK expects to be on the hook for at least €9.75bn of EU staff pension liabilities, the government said this week.
Asked for details of the pension section of UK’s withdrawal agreement, Michael Bates, minister for international development, stated that the country’s liabilities were calculated based on the ratio of the UK’s EU budget contributions between 2014 and 2020 compared to the total contributions of all member states.
The withdrawal agreement, struck between the UK government and the EU in November last year, specifies that the final pension bill will be based on the EU staff pension fund’s membership as of 31 December 2020, meaning that the bill could increase from the current estimate, which was based on data from 31 October 2018.
According to the agreement, the payments will be made in 10 instalments, with the first due on 31 October 2021.
As well as European Commission staff and MEPs, the pension liabilities also relate to current and former staff of the European Defence Agency, the European Union Institute for Security Studies, and the European Union Satellite Centre.
The EU will send the UK an updated estimate every year from 2022, calculated “using actuarial valuations made in accordance with the relevant International Public Sector Accounting Standards”.
The expected bill is in line with an estimate made in 2017 by think tank Breugel, which put the UK’s total obligations at between €7.7bn and €10bn.
Authors Zsolt Darvas, Konstantinos Efstathiou, and Inês Goncalves Raposo argued at the time that the discount rate used for calculating staff contributions was “unjustified”, as it had resulted in staff collectively contributing less towards annual pension costs than the one-third they were supposed to.
In 2015, staff contributions were measured using a discount rate based an 18-year historical moving average. This was set to increase gradually to a 30-year average by 2021.
“Since nominal and real interest rates have fallen in many advanced countries in the past 30 to 40 years,” the authors wrote, “there was a big decline in the balance sheet discount rate after the euro crisis abated after 2012. This decline pushed up the present value of pension/sickness insurance liabilities. In contrast, since the length of the historical moving average used for the staff contribution calculations has gradually increased in recent years, that discount rate has in fact increased, contrasting with the global decline in interest rates.”
The authors said this implied that EU staff had been “underfinancing their pensions… and will continue to underfinance for more than a decade to come, compared to the theoretical requirement”. If liabilities were calculated using a risk-free rate, as is common practice in the UK, then staff contributions could increase “substantially”, they added.