June 29, 2009

The British-North American Committee Public Sector Pensions Report warns that the true costs of public sector pensions are being significantly understated by the U.S., UK and Canadian governments.

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In the UK, where unfunded schemes predominate, public sector pension liabilities are already equivalent to 85 percent of GDP.  This is three times higher than in North America, where the majority of public sector schemes are now funded to meet all or some of the cost of anticipated future pension liabilities.  In the U.S., the same figure is “only” 28% of GDP, and in Canada, it is 27 percent.  BNAC’s report found that all three countries use interest rates in their pension calculations that are higher than their own sovereign market-based interest rates as required by the International Public Sector Accounting Standards Board (IPSAB) Standard IPSAS25.  This results in liability calculations below the market rate calculation.

The BNAC study makes three recommendations:

  • Transparency of costs in public bodies’ reports to taxpayers, particularly in calculation methodology, should be the first priority of all three governments.
  • Pension liabilities promised by a public body should be valued (and charged for) at sovereign market interest rates.  Any other interest rate is likely to understate the true cost of pensions and distort reporting between unfunded and funded pension schemes.  This recommendation is in line with IPSAS25.
  • Consideration should be given to amortizing or monetizing net public pension liabilities, so that intergenerational transfers between taxpayers are explicit.

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Photo by Flickr user Robert Stokes under Creative Commons license.

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