December 9, 2010 / 5:55 PM / 7 years ago

UK consults on calculation of public pension costs

LONDON (Reuters) - The government launched on Thursday a consultation into the method it uses to calculate public pension obligations, which pension experts say underestimates them.

Official figures put public pension liabilities at just under 800 billion pounds but some pension industry experts say they are well over 1 trillion pounds.

The difference depends on the calculation methodology.

The 12-week consultation, launched by the Treasury, polls the pension industry on the rate used to calculate the future cost of public sector pensions.

The consultation comes after a report by ex-Labour minister Lord John Hutton in October who recommended that the government review the current basis for calculation -- the retail price index (RPI) plus 3.5 percent -- saying it was too “optimistic,” effectively underestimating liabilities.

Neil Record, the author of studies on public pension liabilities and founder of investment house Record Plc, argued the government should use gilt yields as the discount rate.

This would result in a dramatic public pension liabilities increase because the higher the discount rate is, the lower the estimate of liabilities and vice versa.

Even a relatively small change to say 3 percent above RPI inflation would increase total contributions by up to 4 billion pounds a year, Hutton said in his report.

By determining the discount rate, the government effectively has control over public pension liabilities estimates, unlike corporate pension schemes, which must refer to the yields of good quality corporate bonds.

Hutton is due to publish a final report in March 2011.

Reporting by Cecilia Valente; Editing by Ron Askew

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