Wednesday, 30 May 2012

Don't worry about the big numbers! Just look at the little numbers!

Spotted by Bob E in The Guardian:

PleaseSeeSense2, 30 May 2012 1:24PM:

What the government are not telling people is that the NHS pension scheme has a surplus of about £2bn - so it is easily affordable. This is another government attack on the NHS as they want more people to pay to go private.

As Bob explains, the NHS scheme is "an unfunded public sector scheme", which is a round about way of saying "there really isn't a pension fund, so it can't possibly be in surplus". It doesn't have "invested assets" so the only way it could generate "a surplus" would be by adopting an accounting strategy that showed that "payments into the scheme in the year" exceeded "payments made out by it during the year" by £2 billion.

GPs make "personal contributions", but these are purely notional, it is money that is nominally added to their salaries and then deducted again and the NHS as employers make "employer contributions" into the scheme, which are also purely notional as there is no fund. The ultimate source of the real cash payments which will redeem these notional contributions (i.e. pensions in payment) is future NHS budgets, which are funded by central government/the taxpayer.

As it happens, the NHS Pension Scheme & Premature Retirement Scheme Annual Accounts 2010-11 do show a figure of £1.7 billion for the value of "Excess cash receipts surrendered to the Consolidated Fund collected", i.e. the balancing figure between various estimates of transfers and payments in and out (page 25).

Big number, huh?

Is it heck!

The most reliable number in the whole accounts is the estimate of the total cost of all future pensions to be paid out, which is £257.7 billion (Table E, page 14).

And that's not really the final cash cost either. That will be a much larger figure, but the expected future payments have been discounted (i.e. reduced) at an annual rate of 5.6% (Table D, page 13) which is wa-a-ay too high.

The NHS final salary pension liability is to all intents and purposes UK government debt redeemable a few decades into the future, so the appropriate discount rate is the yield on UK government bonds redeemable a few decades into the future, i.e. about 3%, which would add at least half again to the £257.7 billion figure.


Hopper said...

By the Grauniad commentator's math, the NHS pension scheme will never go into the red as long as it keeps raising salaries and employing additional people at a suitable increment. I think I've seen this financial model somewhere before.

Lola said...

The latest estimates I had were that the 'employer' ( i.e. wealth creating taxpayers in private business ) support costs of the NHS scheme were upwards of 35% of salary roll.

All final salary schemes are a version of a Ponzi scheme. I can just about tolerate those run by private business for their own staff, but the public sector ones are just that - Ponzi schemes.

Mark Wadsworth said...

H, yes, that's the general idea.

L, 35% seems a tad on the high side, but as you well know, you'd have to set aside 25% or so of your income throughout a 30 - 40 year working life in order to have a 50% final salary pension, and GPs and surgeons, the really expensive 'employees', don't start earning properly until quite late in life.

Bayard said...

"The most reliable number in the whole accounts is the estimate of the total cost of all future pensions to be paid out, which is £257.7 billion"

Yes, but what does that amount to per year? and anyway, given the impossibility of funding all pensions through the returns on a fund, in that there are simply not enough assets to go round*, isn't a good idea for public sector pensions to be paid out of current gov't revenue?

*of course, if all UK land was owned by pension funds and we all rented (like in Hong Kong), there probably would be enough assets.

Mark Wadsworth said...

B, true, a forecast of what actual cash payouts will be (net of nominal tax) would also be useful, I'd guess £10 billion a year or something. And seeing as it's a pay-as-you-go scheme, why do we try and pretend otehrwise? The bad news is there are no underlying investments; the good news is, there is no investment risk either and the cash costs are known.