Public sector pension hole widens

Future generations of taxpayers will be plugging the existing gap

Public sector pensions will need an extra £580bn pumped into them over the coming decades, says a leading actuary.

The new estimate from Watson Wyatt is almost 50% higher than the most recently published official estimate.

Many public sector pension schemes are "unfunded", and operate on a pay-as-you-go basis.

This means any liabilities that cannot be covered with increased contributions from members has to be paid for through general taxation.

Actuary firm Lane, Clark and Peacock recently estimated the cost of increasing life expectancy alone would add an extra £50bn over the next 30 years to public sector pension funds.

The most recent official estimate of total liabilities across all unfunded public sector pension schemes was £380bn on 31 March 2002.

If Watson Wyatt is right, it now means these total liabilities dwarf both government debt and private sector pension scheme deficits.

Underestimating returns

Watson Wyatt said changes in the way pension fund liabilities were calculated, and greater life expectancy, were increasing the pressure on public sector pension schemes.

However, it said the biggest issue was that the assumed rate of return would be much less than the government was predicting, at 4.7% rather than 6%.

Watson Wyatt said about four-fifths of the total liability was in the schemes of teachers, the NHS, civil service and armed forces.

The rest was held by the police, fire service and numerous smaller schemes, including some for the devolved administrations.

It is clearly going to be a major drag on public finances going forward Stephen Yeo, Watson Wyatt

"This money does not have to be covered in the immediate future, but £580bn is our estimate of the amount of money public sector workers and taxpayers will have to pay out over the next 60 or 70 years to cover the cost of benefits that have already accrued," Stephen Yeo, senior consultant at Watson Wyatt told BBC News Online.

In addition, any extra costs that will accrue in the future will have to be met by additional funds.

"It is clearly going to be a major drag on public finances going forward," said Mr Yeo.

The government is in the process of introducing changes, such as increasing retirement ages, which should alleviate some of the existing liabilities.

But Mr Yeo warned this would "not reduce the liability of £580bn".