UK - Falling interest rates have wiped out the projected 50-year savings from raising the pension age to 65 for new entrants to public sector pension schemes, according to Watson Wyatt.
The figure on the UK Government’s books for the accrued value of unfunded public sector pensions is likely to have increased by almost £60bn on 1 April 2005 due to falling interest rates, compared to the projected savings of £13bn over 50 years from increasing the pension age for new entrants.
Stephen Yeo (pictured), senior consultant at Watson Wyatt, said the scale of the problem could worsen as more recent statistics become available. “The increase in the accrued liability due to just one year’s accounting change is over four times the saving over the next 50 years from increasing the pension age for new entrants. Even this increase is an underestimate, because interest rates have continued to fall since the discount rate was last reviewed.”
Liability figures at April 2005 for some of the large unfunded public sector pension schemes are not yet available, but the liability for the civil service scheme has increased by 12.5% due to the change. If the same increase applied across the whole unfunded public sector, the liability would increase by £57.5 billion, Watson Wyatt said.
Using the FRS17 accounting standard, the latest available government figure for the accrued liability for all unfunded public sector pensions was £460bn as at 31 March 2004, according to research by Watson Wyatt.
This was calculated using a real discount rate, or interest rate in excess of inflation, of 3.5%. On 1 April 2005, the discount rate reduced to 2.8% to match the yield obtainable on AA-rated corporate bonds in 2004.
This week's edition of Professional Pensions is out now.
Nearly 60% of UK employers consider defined contribution (DC) master trusts to be the "most suitable" pension fund for their employees, according to research by Buck.
Companies which have tried to dodge their pension duties by changing their identities are being "hunted" by The Pensions Regulator (TPR) in a crackdown on non-compliance with auto-enrolment (AE).
Removing liquidity restrictions would enable DC funds to capitalise on the potentially higher and safer returns that DB schemes have benefitted from, says Patrick Marshall.