Patrick Hosking has uncovered a report from the Government Actuary that the debt accounted  to the nation to pay NHS pension promises, has fallen from £841 billion as at March 31, 2022 to £461 billion just a year later. That’s theoretically a £340bn windfall to the Government based on a rise in the discount rate used to value liabilities that are 30, 40 or 50 or more years to come.

The reason the scheme’s liabilities have shrunk is that it is discounting future liabilities by 4.15 per cent per year, up from 1.55 per cent a year ago. As the Times points out,

A 0.5 percentage point increase or decrease to the discount rate respectively cuts or lifts the total NHS pensions bill by an astonishing £41.5 billion — just a bit less than the entire annual defence budget for example.

Understandably, no one is taking these numbers too seriously, if the Chancellor did, he could wipe 1p off income tax for 70 years, The total revenue collected from inheritance tax this year will be around 5% of the imputed fall in NHS pension liabilities.

But these huge changes are “off the national balance sheet”, Britain’s “solvency” is not measured on the basis of our NHS pension promises, any more than our promises to members of other unfunded pension schemes or by our promises to ourselves from the state pension scheme.

You might wonder why the markets do not price these promises into their view of Britain’s economic viability and adjust our debt accordingly. I wonder about that too.

Some of GAD’s numbers appear real to me, Former medical staff aren’t living as long as they were expected to, and that feeds through into the mortality assumptions. Life expectancy for those in middle age has been shaved by between six months and a year, compared with two years ago. But this accounts for “only” £15bn of the £340bn deficit and can hardly be treated as a windfall , as it plays out over the rest of the century. There is little comfort in knowing that we have overestimated life-expectancy, especially when the purpose of the NHS is to extend it.

But the bulk of the £340bn is based on a view of the nation’s indebtedness as fictional as of the fall in its liabilities. The long-term target for inflation , given to the Bank of England , remains 2%, the current rate of CPI is 4.6% and the intention of the Chancellor and BOE is to bring the headline rate of inflation down so that interest rates will follow.

When interest rates fall, the valuation of pension liabilities will increase again, not just for Government unfunded pensions but for all pensions, included the funded ones in the public and private sector. That is why we should regard the current period where we consider pensions “over-funded” as exceptional.

The Government has another way of measuring pensions. This measure is not just based on accounting but on the affordability of future pension promises and the affordability is measured around cashflows and not discount rates. The “affordability measure” drives the demands on employers participating in unfunded schemes and is based on the growth or decline of Britain’s gross domestic productivity (GDP),

Based on current estimates (again from the Government Actuary), the affordability of these pensions is getting worse, which means demands to employers participating in public sector schemes are increasing (in line with the SCAPE rate).

The Government has a lot more interest rate in the SCAPE rate as it governs current cash-flows, influencing everything from the employer and member contribution rate to arcane issues like the promotion  of salary sacrifice for NHS AVCs. Cashflows are behind the Treasury’s concerns about the public purse

Lessons to be learned

I am neither an economist nor an actuary, but I worry about the future and the affordability of pension promises because I am a pensioner and the second oldest surviving member of my immediate family.

Those who come behind me, will need either to sacrifice more of their standard of living while working or work more productively. The SCAPE rate will fall if Britain becomes more productive or rise if we don’t. The big picture policy – the Mansion House reforms, recognise that the £2.5 trillion pounds , tied up in funded pensions, could unlock the economic growth in Britain that could make all pensions affordable.

The big lesson to be learned from the almost farcical numbers published by GAD relating to the NHS pension scheme is that we cannot rely on discount rates alone. There must be something more fundamental to underpin our understanding of future pension promises, Con Keating has arrived on the contractual accrual rate – an underlying rate of growth on the assets held by a funded pension scheme. The Government Actuary has arrived on the SCAPE rate , a measure of the the underlying growth of the UK economy, the two measures seem linked.

The lesson to be learned is that there should be a better understanding of pensions in general, based not on financial economics but on fundamental economics, on our understanding of the growth in the wealth of this nation.

This has been the slogan of the Pension PlayPen since we dreamt it up in 2007, Tomorrow, Pension PlayPen will be debating why young people hate pensions (I am not sure they do).  I think there is a wider question about why people have so little confidence in them and I suspect that is down to our having little confidence in our capacity to pay them in decades to come.

I do not share this view, I have every confidence in our ability to progress our national finances and pay our pension promises. I have every confidence in succeeding generations to succeed.