Budget 2024: Pensions black hole?

Allan Martin, pensions actuary, explains the missing “black hole” in public sector pension promises that won’t be discussed this budget day.

Black hole

On Wednesday 30 October 2024, Chancellor Reeves, will address a Revenue Account back hole of £22 billion (bn), but what is being done about the country’s much larger pension Balance Sheet ‘Black Hole’ of about £400bn in respect of unfunded public sector pension promises?

Around £50bn of unfunded public sector pension promises are made each year on a defined benefit basis. This is a very valuable benefit, rarely available in the private sector. These promises increase the National Debt and are underwritten by future tax payers: you, your children and grandchildren.

Trillions in future liabilities 

“Your” total future tax-payer Balance Sheet liability for these accrued pensions was £2.64 trillion at 31 March 2022 (the latest published accounts). The figure for subsequent year ends will be significantly reduced with the transformation in real interest rates post-Trussenomics (Sept 2022) to, say, £1.5 trillion. Any comparison with the £600bn index linked gilt issuance should be tempered with consideration of the longer term and higher coupons.

Discount rate

Crucially however, the calculated benefits, employee contribution rates and retirement ages are based on the SCAPE discount rate, reflecting assumed growth in the economy as measured by GDP. The discount rate has reduced from an average of CPI + 3% pa on all accrued benefits, to CPI + 1.7% pa with effect from 6th April 2024. You are therefore invited to consider the Balance Sheet deficit emerging from this re-assessment of GDP growth. It is probably about £400bn. You are then invited to compare this Balance Sheet figure to the Revenue Account black hole of £22bn. The rising pension liability dwarfs the £22bn but you can also see why growth in the economy is receiving so much attention!

Funded pensions?

One could write to HM Treasury with a tongue-in-cheek suggestion of financing Civil Service pensions from a pot of real money instead of more promises on behalf of younger people. But this would result in outright rejection, as it would “have immediate and significant impacts on Public Sector Net Borrowing”.

All public servants will want a defined benefit (DB) pension, not just those starting a late, early or night shift as you read this. HM Treasury should however admit the scale and significance of the growing public sector pensions liability.

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Credit: Wikimedia Commons: Physics education group Kraus, Universität Hildesheim, Space Time Travel, (background image of the milky way: Axel Mellinger)