UK – Management consultant Watson Wyatt today stated that falling interest rates have wiped almost £60bn off public sector pension savings.
The amount is four times the government’s 50-year projected savings of £13bn gained from increasing the pensions age to 65 for all new public sector entrants.
A Watson Wyatt analysis of government’s figures for the total value of unfunded public sector pensions revealed a “likely” increase of close to £60bn on 1 April 2005 due to declining interest rates.
“Falling interest rates and increased longevity mean that the cost of pensions has risen,” said senior Watson Wyatt consultant Stephen Yeo.
“The long-term nature of pensions means that seemingly small changes in interest rates have a very large effect on accrued liabilities,” he added. “The public sector has lagged behind the private sector in recognising these greater costs.”
Public sector pensions, like private sector defined benefit pensions, have been subjected to the FRS17 accounting standard for more than two years.
In March 2004, the use of this standard using a 3.5% real discount rate showed the accrued liability for all unfunded public sector pensions stood at £460bn.
In April, this rate dropped to 2.8% to match the yield obtainable on AA-rated corporate bonds in 2004.
While liability figures in April were not available for some of the larger unfunded schemes such as the health service, the civil service scheme increased by one-eighth due to the change.
“If the same increase applied across the whole unfunded public sector, the liability would increase by £57.5bn,” said the Watson Wyatt press release.