BRIEFING NOTE

The cost of public sector pensions to taxpayers in 2009-10

There has been much recent debate about the cost of public sector pensions,and a proper understanding of these costs tends to get lost in the mist of“unfunded liabilities”, “discount rates” and other jargon that is often unintelligible.Confusion over the total amount of unfunded liabilities of public sector pensionsand the annual cost of meeting those liabilities, as well as the fact that not allpublic sector schemes are unfunded, further complicates the picture.At the high end, the Treasury estimates that the “total departmental AME” cost ofpublic sector pensions in 2009-10, including the “unwinding of the discount rate”,is £40.3 billion.

Much of this, however, will not have to be paid in 2009-10, but infuture years. At the other end, the TUC last week quoted the Treasury’s figurefor the “contribution to TME” of public sector pensions, which in 2009-10 is set tobe £4.1 billion.

The TUC claimed that this represented the “cost” of public sectorpensions, but this figure of course ignores employer (i.e. taxpayer) contributions,as well as the build-up of liabilities that will have to be paid in the future.By way of clarification, this note attempts to explain the cost of public sectorpensions to taxpayers in this financial year. It ignores any costs which will fall infuture years through the build-up of liabilities, and therefore is not subject tovarying estimates of the discount rate. It is a snapshot of what is an extremelycomplex area.

The cost of public sector pensions to taxpayers in 2009-10 is £21.6 billion.

The calculation is as follows:1. For

unfunded

public sector pension schemes, contributions from public sectoremployees and employers (i.e. taxpayers) in 2009-10 directly fund paymentsto retirees in 2009-10. The Treasury then tops up the contributions receivedin order to meet the necessary payments to retirees.2. In 2009-10, payments to retirees in the

unfunded

public sector schemes areset to be £24.151 billion. These payments are met through a projected£20.033 billion of employer and employee contributions and £4.118 billion oftop-up from the Treasury (“contribution to TME”).

3. It is reasonable to include the top-up from the Treasury and the employercontributions in a calculation of taxpayer costs, but not the employeecontributions, since these employee contributions are funded out of theemployee’s salary.

HM Treasury,

Public Expenditure Statistical Analyses 2009

, Table D1

TUC,

Decent pensions for all,

September 2009

HM Treasury,

Public Expenditure Statistical Analyses 2009

, Table D1