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"My report today sets out clearly the facts surrounding current cash payments from the public service pay-as-you-go pension schemes and the basis for future projections of these payments. The Treasury has performed some analysis on the sensitivity of its projections to changing assumptions, but has not considered the potentially significant effects of changes in the size of the public service workforce.

"Later this year I intend to report to Parliament on recent changes to the schemes, which are designed partly to reduce costs."

Amyas Morse, head of the National Audit Office, 12 March 2010

There has been much public discussion about the affordability of public service pensions. To inform that debate, the National Audit Office has today published a report designed to bring greater transparency to, and understanding of, the cash costs involved. Today’s report found:

• Total payments to more than 2 million pensioners in the UK’s four largest pay-as-you-go pension schemes (also known as unfunded schemes – where current employee and employer contributions are used to pay current pensions) were £19.3 billion in 2008-09, a real terms increase of 38 per cent since 1999-2000. This is driven by more employees retiring each year, which is a substantially more significant factor than longer lifespans.
• Employee contributions of £4.4 billion reduced the taxpayer’s share of costs to £14.9 billion in 2008-09. The employee element grew by 56 per cent in real terms since 1999-2000 because staff numbers and contribution rates have increased.

Today’s report also looked at projections of payments across all UK public sector pay-as-you-go pension schemes over the next fifty years. The report found:

• Expressed in terms of constant 2008-09 prices, the Government Actuary’s Department projects total payments rising to over £79 billion a year by 2059-60. This is before allowing for income from employee contributions.
• Expressed in terms that track earnings, which rise more quickly than prices, projected payments reach £28.8 billion by 2059-60.
• However, expressed as a proportion of GDP, the projected increase is less stark, as GDP is also assumed to rise. Projected payments are estimated to reach a peak of 1.9 per cent of GDP between 2018-19 and 2033-34 then fall to 1.7 per cent by 2059-60. This compares with a rise from around 1.5 per cent to 1.7 per cent over the last decade.

Estimates of future payments depend on assumptions (covering matters such as life expectancy, earnings growth, the size of the public sector workforce and recent changes to contain costs) used as the basis of calculations. Changes to these assumptions can have a large impact on the projections. The Treasury has a reasonable framework in place for assessing future costs and has undertaken some analysis on the sensitivity of projections to changes in key assumptions. However, the Treasury has not undertaken any systematic analysis of the effects of changing its assumption that there will be zero public service headcount growth, despite the existence of several factors that could put upwards pressure on staff numbers in the long term.

The NAO will publish a second report later this year examining the impact of recent changes on the overall cost of the UK public service pay-as-you-go pension schemes.