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Owners grow more hopeful of house price rises

Unfunded public-sector pension liabilities are reckoned to be nearly 700bn, almost 60 per cent higher than the Government’s most recent estimate.

Actuarial consultancy Watson Wyatt says it expects unfunded public-sector liabilities to hit 690bn by March compared with the Government’s last estimate of 425bn in March 2003.

The bulk of liabilities relate to four massive schemes for teachers, the NHS, civil service and armed forces which account for 78 per cent of all unfunded public sector liabilities, with the remainder made up of a combination of the police, fire service, various Scottish bodies and other schemes.

Watson Wyatt partner Stephen Yeo says given that companies have to account for pension liabilities on their balance sheets, it is vital that public sector liabilities are accounted for, particularly when the massive size is taken into consideration.

Yeo says the Government Actuary’s Department has been using an inappropriate discount rate of 3.5 per cent to calculate liabilities.

This figure will be reduced to 2.8 per cent from the next tax year, equivalent to the yield on AA-rated corporate bonds and similar to the figure used by private companies under FRS17, says Yeo.

But since public-sector pensions are backed by gilts, he says the discount rate used should be nearer 1.7 per cent, hence the discrepancy.

Yeo says: “This is a significant underestimate because it assumes very high rates of interest can be earned. Once account is taken of current low expected real returns, two years’ further accrual and improving mortality, this figure increases by over 60 per cent to 690bn.”

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