Most of us in employment or self-employed either have a personal pension or probably a Group Personal Pension provided by our employers. These are “defined contribution schemes” and employee and employer pay in at agreed levels of salary. The money goes into a pot and is invested by the scheme provider which is usually a large life assurer. Most of us have suffered big falls in our pots in the last year because of stock market falls. On retirement the value of your pot determines the size of pension you get by way of an annuity.
Prior to defined contribution schemes, good employers used to provide “defined benefit” schemes, also referred to as “final salary” schemes. In this case, actuaries determine appropriate contribution levels and what level of benefit will be received on retirement, given 40 years service (or whatever). The contributions are still invested in the stock market and elsewhere and subject to fluctuation. In recent years these schemes have been closed to new entrants and started to wind down. Changing business practise, demographics and accounting regulations are all blamed. Some members of these schemes won’t get the pensions they expected because the schemes are under-funded. This is the problem with the Royal Mail pension scheme which has a funding gap (according to actuaries) of about Â£9bn.
Public Sector pensions (like the state old age pension) are different. There is no pot of contributions from past and present workers and there never has been. It’s just a promise from the state that a pension based on final salary will be paid. It is a great big Ponzi scheme and relies on current and future tax payers to pay existing and future pensions. Whilst most of our pensions are at the mercy of stock markets and robbery by Gordon Brown (when he changed the rules on pension schemes reclaiming ACT on dividends), Public Servants have no such worries. As the payment of Public Service Pensions is listed as an annual expense in the national accounts (2009-10 Â£4.1bn, 2010-11 Â£4.6bn), there is no disclosure in the budget document of how much the total liability to the state might be at this time. There is however a reference to another document, the “Long-Term Public Finance Report” (hm-treasury.gov.uk/d/bud08_longterm_586.pdf).
Page 38 of this report has a box which starts by saying the following:
“Box 4.3: Unfunded public service pension liabilities
The total liability of the unfunded public service occupational pension schemes as at 31 March 2006 was estimated by the Government Actuary’s Department (GAD) to have been Â£650 billion. The estimate published previously for the total liability at 31 March 2005 was Â£530 billion.”
Note the dates on this. The document was published March 2008 and refers to assessments at 31 March 2006. How much bigger has the Public Sector got since then? And consider just how big a jump there was in just one year, that’s 22.6%.
Note also that the figures above make no reference to the state old age pension which I believe is funded through the Social Security budget (2009-10 Â£164.7bn, 2010-11 Â£170.9bn).