UK - The UK government has been accused of hiding the true cost of unfunded public sector pensions by refusing to conform to international accounting standards and using two different discount rates in calculations, a former Bank of England economist has claimed.

In his report, Sir Humphrey's Legacy: An Update, published by the Institute of Economic Affairs (IEA), Neil Record argued the government is using an "artificial interest rate to depress the apparent annual cost of public sector pensions" and has failed to publish figures on its outstanding liabilities for two years.

Record admitted the government has finally started to use a more realistic discount rate to value its liabilities, moving in stages from 3.5% to the current 1.8% as of March 2007, but warned it refuses to apply the new International Employee Benefits accounting standards for the Public Sector (IPSAS 25), and instead adheres to Financial Reporting Standard 17 (FRS17) which is used by private sector companies.

As a result, Record believes a more realistic estimate of public sector liabilities is almost £1.1trn (€1.5trn), compared to the government estimate of £835bn, which has been calculated without the risk-free discount rate used in IPSAS 25.

The government's reasoning for not implementing IPSAS 25, outlined in the report, is it does not want to be "set apart from other [private sector] entities" which use FRS17, but according to Record this suggests the government wants to retain the option to reduce scheme liabilities, and implies a possible risk to pensions which have already been accrued.

That said, Record claimed the biggest problem was the way in which the UK government is calculating the contribution rates for public sector employers and employees, as it is using a discount rate of 3.5% in calculations for contributions but a figure of 1.8% to value existing liabilities.

This results in the contributions charged to employers and employees being reduced by £10bn, with the contribution rate currently at 18.6% of salary, compared to the 35% which would be payable under international accounting standards.

In addition, the report revealed figures from HM Treasury's Public Expenditure Statistical Analyses (PESA) document show the planned public sector pension cost for 2007-08 is £28.9bn, however contributions are estimated at £19.3bn, leaving a shortfall of £9.6bn to fall on the taxpayer. 

The research also warned because the government also fails to include the cost of pension accrual in its annual public spending figures, if public sector pension costs were properly accounted for the government public sector deficit would almost double from £34bn to £74.1bn, or 5.4% of GDP.

Recommendations put forward by Record in the report include:

the immediate publication of the 2006 and 2007 figures and a timetable for future annual publications; for the government to conform to IPSAS 25, and for government actuaries to start using the same discount rate for contribution rates as the valuation of liabilities.

"The Bank of England is costing all its pension provision at a risk free rate of interest and has found its required contribution rate is over 40% of salary. Exactly the same principles should be applied to all public sector employers so the cost of providing pensions is fully understood," Record added.

Phillip Hammond, shadow chief secretary to the Treasury for the opposition Conservative party, said: "According to this new report, the unfunded liability of public sector pensions is now a staggering £43,000 for every family in Britain.

"This is more evidence of the prime minister's economic incompetence. He has lost his grip on public sector pension liabilities and he is mortgaging the future with unfunded promises," he added.

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