Interactive Investor

‘Eye-watering’ £1 trillion increase in public cost of pensions

9th February 2021 14:11

Laura Miller from interactive investor

State and public sector pension costs rise to £6 trillion.

The public cost of government pension promises has jumped by almost £1 trillion in three years, according to figures branded ‘eye-watering’ by a former pension minister.

State pension liabilities are hugely expensive to the Treasury coffers, rising from £4.02 trillion in 2015 to £4.72 trillion in 2018, figures from the Office for National Statistics (ONS) showed.

Public sector pension liabilities have also jumped, from £917 billion in 2015 to £1.18 trillion in 2018.

In total, the government’s pension liabilities grew from £5.3 trillion at the end of 2015 to £6.4 trillion at the end of 2018.

The large jump is due to an accounting change in how the government’s pension liabilities are calculated, which especially affects the state pension figures. But these high numbers are still likely to cause problems for the public purse.

Steve Webb, a former pensions minister, says: “Our ability to pay future pension promises depends on the size of the future economy. And if we now think that the future economy is going to be smaller than we previously thought, then the burden of paying future state pensions and public sector pensions is going to be tougher than we thought.”

The cost of funding the pensions of public sector workers such as teachers, nurses and civil servants “seems to have risen faster than GDP”, he added.

“This matters because it’s basically a set of promises for future taxpayers to meet the bill,” Webb says.

The biggest concern about the figures is that the ONS now thinks that the economy in the future – when all these pension promises will have to be met – is going to be smaller than they thought.  

This means pain for future taxpayers is going to be greater when it comes to paying out state pensions and ‘unfunded’ public sector pensions to retired teachers, nurses, civil servants, police officers and others.

Webb, now a partner at pension consultancy LCP said: “The state pension system and the pensions of nurses, teachers and civil servants are based on a set of promises which tomorrow’s taxpayers will have to honour. The affordability of these massive promises depends on the size of the UK economy in the future.”  

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