Allan Martin has written a thoughtful article on the differences between setting pension funding the Government way (Scape) and the way the private sector does it.
The original comment can be found on my article on “pre and post 1992 universities”.
He is referring to Unfunded Public Sector Pension Schemes (UPSPS). Below is his comment, his website is here
May I add a wider perspective?
- The SCAPE (Superannuation Contributions Adjusted for Past Experience) discount rate is used to calculate contributions and benefits (and retirement ages) for the ~5m members of the UK UPSPS – Teachers, NHS staff, Police, Firefighters, Armed Forces and Civil Servants (as well as the new universities). These defined benefit (DB) benefits are paid from future taxes. They are not publicly appreciated in the same way as the PAYG state pension.
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The media, most MPs and Lords, scheme members and voters don’t appreciate the scale, significance and GDP dependence of these future pension promises. H M Treasury appear to prefer limited transparency around this future taxpayer liability, and in particular exclusion from the Public Sector Net Borrowing.
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The economy is the “fund” and the assumed fund growth or investment return (SCAPE) in turn represents assumed economic growth and is based on OBR estimates of real GDP growth. Not achieving the assumed GDP growth implies challenges of sustainability and intergenerational unfairness on all future tax payers. In arithmetic terms the comparison is a Ponzi Scheme.
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Modern universities and the whole public sector are hugely important to UK society. I think that all public sector workers thoroughly deserve a defined benefit pension, not just those starting or finishing a night shift whilst you read this piece. Fundamental change would however arguably require a Royal Commission.
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The latest Whole of Government Accounts (2022-23) put the UPSPS accrued index linked pension debt at £1.42tn. I suggest that the difference between these pension promises and index linked gilts arguably only involves vastly greater issuance, longer terms, higher coupons and 5m votes!
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The historic SCAPE discount rate, averaging CPI + 3% per annum, was based on assumed GDP growth. No reminders will be required for the effects on GDP of the global financial crisis, QE, Brexit, C19 or the war in Ukraine. (1.16% pa real growth January 2010 – January 2025). Actuarial valuations and experience involve many aspects, but we can only imagine what the tabloid headline would be of equating a one year 1% GDP shortfall to 1-2% on the basic rate of income tax? (Benefit revaluation and indexation in line with actual or achieved GDP growth is the suggested solution, to reward and share economic growth.)
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Post April 2024 benefit accrual uses a reduced SCAPE discount rate of CPI + 1.7% per annum. This still involves a demanding underlying future taxpayer guarantee. The crystallisation or capital impact of this discount rate reduction might exceed £300bn in a private sector actuarial balance sheet, dwarfing the £22bn October 2024 budget black hole! Sorry modern universities and other participating non-public sector employers have been historically undercharged and have been subsidised by taxpayers.
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The GDP accountability in UPSPS actuarial valuations: the supposed allowance in employer contributions for past service experience, is to be blunt, farcical. Treasury Regulations require the Government Actuary to use assumed GDP growth, not actual or achieved growth. (A personal Freedom of Information request revealed full GAD appreciation of the scale of this. H M Treasury was informed that the NHS (E&W) 2012 valuation employer contribution rate would have doubled if the more realistic private sector approach had been adopted.
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The above practice in the private sector would involve regulatory sanction and charges of unprofessional conduct on actuaries and professional trustees. It is also unfortunate that the Pensions Regulator doesn’t regulate their own staff DB pensions.
The tip of an iceberg?
Allan C Martin BSc FFA
17th August 2025
