Teachers are on strike today. One of the reasons is their anger over pension entitlements becoming less generous after reforms become effective in April 2015. These reforms don't much affect the rights to pensions they've built up already. The changes are primarily about what additional pension rights they'll be entitled to thereafter.
But there's a huge problem with the cost of these pensions. As the unions fight for more generous terms and the Government decides how much of the next generation’s money it is prepared to promise them, they aren’t recognising the true scale of how much those promises will cost.
The Government has not put a single penny aside to pay for them and it's also in denial about just how big those commitments are. Across the public sector, it says that unfunded pension schemes have liabilities worth £1.1 trillion. The problem is that this number is calculated using an artificial measure of the how to value what payments in the future are worth in today's money.
Instead of using market 'discount rates' to account for how money set aside to pay for future commitments should grow, the Government invents its own number and this number makes the size of the liabilities seem a lot smaller than they really are. The TaxPayers' Alliance asked finance and pensions expert Neil Record to estimate the difference between the real and official size. He found that the Government is downplaying the value of its promises by a colossal £610 billion.
The real value of these commitments is not the £1.1 trillion the Government claims. It's £1.7 trillion, a figure which has swelled by £1 trillion since 2003-04. In other words, it’s been getting bigger by £100 billion every year, on average. And that's on top of the £1.2 trillion in the official National Debt.
Private sector pension schemes aren't allowed to invent their own discount rates to make their liabilities seem rosier. The Government shouldn't be allowed to, either. It's time they were a little more honest about how much public sector pension promises will cost taxpayers.