Unfunded black hole in NHS pensions schemes grows to £26.8 billion

The black hole in public sector pensions is almost four times larger than originally estimated, Whitehall accounts show. This follows a change in the way the Government works out the cost of its retirement schemes. Government documents show that since last year the amount of annual provision needed for public sector pensions has risen from £24.2 billion to £81 billion. For the NHS the Treasury figures disclosed that the provision for the NHS pension scheme this year is some £26.8 billion, rather than the £7.8 billion in the previous year's figures.

Experts said the increase showed that the public sector pensions bill was growing at an alarming rate.

It came after the Government moved its estimates in line with those used by the private sector and demonstrates the increasing scale of the pensions bill to be borne by taxpayers.

The rise does not, however, mean that more needs to be paid to today's pensioners.

Experts questioned why the Government's policy is not to set aside money now, but to pay the bill from future taxes. By failing to make provision now the final bill will spiral.

Government estimates suggest that it could reach £460 billion, but analysts said the new figures supported independent forecasts that public sector pensions could cost up to £800 billion - double the national debt - in the decades ahead.

The increases, published in the Government's Spring Supplementary Estimates, are the first evidence of the effects of the change in calculations.

They will be embarrassing after last year's decision to scrap plans to raise the public sector retirement age in the face of strike threats.

The Teachers' Pension Scheme for England and Wales is £22.2 billion, compared to £6.9 billion, while the Armed Forces scheme is £14.5 billion rather than £3.8 billion.

The Civil Service superannuation scheme, meanwhile, is £16.7 billion, compared to £5.5 billion previously.

The increases were caused by a change in the so-called "discount rate" used to calculate how fast interest rates will erode the pensions bill.

The Government had previously used a generous formula including a discount rate of 3.5 per cent on its liabilities but has reduced that to 2.8 per cent - closer to rates used by the private sector.

This small percentage change has a dramatic impact because pension costs are spread over so many years.

Philip Hammond, the Tory pensions spokesman, said: "If we are going to have a national debate on pensions, then we have to have transparency and we have to cover private and public sectors on an equal basis. The public sector cannot be insulated from the necessary reforms."

Experts said the increases made estimates of the value of public sector pensions more realistic than in the past.

The "gold-plated" retirement plans enjoyed by public sector employees have come under increased scrutiny in recent years as the pensions crisis surrounding private sector companies intensified.

Almost 90 per cent of public sector pensions are based on final salaries rather than stock market returns, and are inflation-proof.

In contrast, most businesses have closed their final salary schemes after falling investment returns and the fact that people live longer pushed many funds into the red.

The problem was exacerbated by Gordon Brown's 1997 Budget move to strip pension funds of their tax-free status, which helped push savings ratio to record lows.

Although some require members' contributions, most public sector schemes are unfunded, meaning they are paid from taxpayers' money rather than from assets set aside to pay for them.

A Treasury spokesman said: "These figures do not represent the official measure of public sector pensions liabilities. Actual cash payments due each year from Government to pay for liabilities that have been built up over decades and are due to be paid out over decades, are not affected by actuarial and accounting changes to discount rates.

"The annual cash payment from unfunded schemes will rise gradually from about 1.5 per cent of GDP now to 2.1 per cent by the middle of the century, putting the UK in a much better position than many other developed economies to deal with the fiscal challenges of the future."

"Clearly these figures may go up over time. But we make no apologies for employing tens of thousands more doctors, nurses and teachers."

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