UK - The British governent lacks transparency over the way it calculates public pension liabilities claimed Stephen Yeo, senior consultant at Watson Wyatt.
In a recent study conducted by Watson Wyatt, Britain’s unfunded public sector pension liabilities will be approximately £960bn in March 2006, over 80% higher than the most recent government estimate of £530bn.
Yeo said the £530bn figure was calculated on a discount of 3.5% (interest rate) and if added to the current levels of inflation of about 2.9% created a nominal rate of 6.4% on long bonds.
“The real rate is below 4% and that makes a huge difference,” he said. “The last time 3.5% was available in the market was last century.”
On the back of a committe review two years ago the government was finally persuaded to switch from 3.5% to 2.8% but Yeo said the change would only be made in the next accounting year and would still leave an “unrealistically low value on the liability” because of recent sharp falls in interest rates.
“The government decided to adopt FRS17 but did so in a very unusual way. Because central government accounts run on two year spending cycles, they budget for the whole of that period what the discount rate is going to be. They fix it 18 months ahead of that period,” he said.
A Treasury spokesman responded to the claims: 'What matters are the actual public sector pension payments by Government which as a percentage of GDP are exactly the same as set out a year ago. In estimating the total accrued liability of unfunded public service pensions the Government follows guidance approved by the Financial Reporting Advisory Board.' “In more stable times this wouldn’t matter too much but there have been very sharp changes in long term discount rates and if a company had to account for the deficits they have the use the rate applying to the market on that day,” he said.
“The government have the appearance of being transparent but because they have not carried through the principles to the last degree they end up with something that, whilst it’s a regular framework, is something that is meaningless,” he concluded.
In addtion, if the private sector were allowed to use the government’s system for calculating liabilities, Yeo believed the £78bn deficit for the companies in the FTSE350 index would be completely “wiped out”.
By Daniel Flatt
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