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 pensions
and the annual cost of meeting those liabilities, as well as the fact that not all
public sector schemes are unfunded, further complicates the picture.

At the high end, the Treasury estimates that the “total departmental AME” cost of
public sector pensions in 2009-10, including the “unwinding of the discount rate”,
is £40.3 billion.1 Much of this, however, will not have to be paid in 2009-10, but in
future years. At the other end, the TUC last week quoted the Treasury’s figure
for the “contribution to TME” of public sector pensions, which in 2009-10 is set to
be £4.1 billion.2 The TUC claimed that this represented the “cost” of public sector
pensions, 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 sector
pensions to taxpayers in this financial year. It ignores any costs which will fall in
future years through the build-up of liabilities, and therefore is not subject to
varying estimates of the discount rate. It is a snapshot of what is an extremely
complex 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 sector
employees and employers (i.e. taxpayers) in 2009-10 directly fund payments
to retirees in 2009-10. The Treasury then tops up the contributions received
in order to meet the necessary payments to retirees.
2. In 2009-10, payments to retirees in the unfunded public sector schemes are
set to be £24.151 billion. These payments are met through a projected
£20.033 billion of employer and employee contributions and £4.118 billion of
top-up from the Treasury (“contribution to TME”).3
3. It is reasonable to include the top-up from the Treasury and the employer
contributions in a calculation of taxpayer costs, but not the employee
contributions, since these employee contributions are funded out of the
employee’s salary.

1
HM Treasury, Public Expenditure Statistical Analyses 2009, Table D1
2
TUC, Decent pensions for all, September 2009
3
HM Treasury, Public Expenditure Statistical Analyses 2009, Table D1

1
4. The Treasury does not provide a breakdown of employer and employee
contributions, merely giving the aggregate figure. We deplore this lack of
transparency, but it is possible to provide a robust estimate of the employer
share. The Office for National Statistics (ONS) finds that employers
contributed 64.7 per cent of the total contributions to unfunded occupational
schemes in 2007 (latest year available).4 Since, as the ONS states,
“contributions to unfunded private sector pension schemes are rare and there
is little information available on them”,5 we can take this percentage as
applying to the public sector. Further confirmation of this two-thirds/one-third
split can be taken from an analysis of employee and employer contribution
rates, with employer contribution rates at least double that of employees in
the largest public sector pension schemes.6
5. Therefore, the cost of unfunded public sector pensions to taxpayers in 2009-
10 is set to be 64.7 per cent of the £20.033 billion of employee and employer
contributions, which is £12.961 billion, plus the £4.118 billion of top-up from
the Treasury. This equals £17.079 billion.
6. The principal funded public sector pension scheme is the Local Government
Pension Scheme (LGPS). As with defined benefit pension schemes in the
private sector, contributions from employers and employees are invested in a
fund, from which benefits to retirees are paid out. Contributions must be
sufficient for the fund to be able to meet the promised payments to retirees,
now and in the future. There is no top-up from the Treasury in this case. For
the LGPS, it is reasonable to include the employer contributions in a
calculation of taxpayer costs, but not the employee contributions, since these
employee contributions are funded out of the employee’s salary.
7. In 2007-08 (latest year available), total employer contributions to the LGPS
were £4.506 billion.7 (The comparable figure in 2006-07 was £4.281 billion.
In 2009-10, the figure will almost certainly be higher than in 2007-08, but to be
cautious, it is assumed that employer contributions in 2009-10 are at the
same level as in 2007-08.) This figure was obtained from responses to
Freedom of Information requests from the 400-plus local authorities across
the UK. Much of the data is also reported in the annual accounts of councils.
Local authorities do provide a breakdown of employer and employee
contributions, so, unlike with the Treasury, no further calculation is required.
Therefore, the cost of funded public sector pensions is £4.506 billion.
8. Therefore, the cost of public sector pensions to taxpayers in 2009-10 is the
sum of the employer contributions to the unfunded schemes (£12.961 billion),
the Treasury top-up to the unfunded schemes (£4.118 billion), and the
employer contributions to the funded Local Government Pension Scheme
(£4.506 billion), which gives a total of £21.585 billion.

By Corin Taylor, Senior Policy Adviser, September 2009

4
Office for National Statistics, Private pension contributions: updated estimates 1995-2007,
February 2009, Table 3
5
Ibid, p.2
6
For example, in the NHS, Teachers and Civil Service schemes, employee contribution rates
are 5-8.5 per cent, 6.4 per cent and 1.5-3.5 per cent respectively, while employer contribution
rates are 14 per cent, 14.1 per cent and 17.1-26.5 per cent respectively.
7
The TaxPayers’ Alliance, Council Spending Uncovered II: Pension contributions, March
2009