Professor Freeman is a Professor of Finance at the University of York.
He also serves as Deputy Chair of the Financial Conduct Authority’s Cost Benefit Analysis Panel.

Professor Groom is the Dragon Capital Chair in Biodiversity Economics at the University of Exeter. He is also a visiting professor at the LSE.

Mark Freeman researches social discount rates (SDRs) for long-term public project evaluation, advocating for a declining SDR, moving from an initial rate (like 3.5% in UK guidance) down to lower rates (e.g., 2.5% or less) for distant future impacts.

This is a method often called Social Time Preference (STP), contrasting with Social Opportunity Cost of Capital (SOC), and contributing to expert consensus that SDRs should reflect uncertainty and diminishing returns to consumption, with mean expert recommendations around 2-2.27%, emphasising lower rates for climate change.

Ben Groom, however, writing in 2022 with Moritz Drupp, the aforesaid Mark Freeman, Mark Charles and Frikk Nesje in The future, now: A review of social discounting in the Annual Review of Resource Economics. pp. 467-491, concluded

“… to date, governments have tended not to engage with normative debates about the SDR that lie outside standard time-discounted Utilitarianism.

“We have briefly outlined some alternatives to this, which governments may wish to
consider in the future.

“Questions related to the long-run fundamentally deal with issues of intergenerational
distribution and efficiency. This is likely to require more participatory and inclusive approaches than are currently incorporated in governmental guidance.”

The same four academics wrote an earlier paper in 2015 entitled “Discounting disentangled”.

For the second time in a few weeks I’m made to recall Winston Churchill’s quip that

“If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.”

However, as Messrs Freeman and Groom seem to have co-authored a number of academic papers together over the years perhaps their selection for this review may result in a single opinion?

AI meanwhile offers this:

Arguments for Lower SDRs (Valuing the Future More)

* Ethical Duty: Low rates reflect a moral obligation to future generations, ensuring their well-being isn’t unfairly devalued.

* Climate Change Urgency: A low rate makes long-term climate investments seem more cost-effective, supporting immediate action.

* Catastrophic Risk: Some argue very low or even zero rates are needed to account for potentially catastrophic, low-probability climate events, which override standard discounting.

Arguments for Higher SDRs (Reflecting Current Realities)

* Opportunity Cost: Higher rates reflect the lost opportunities (what else could be done with the money now).

* Current Resource Scarcity: Some believe higher rates better account for current economic needs and resource limitations.

* Practicality: Very low rates can lead to massive, potentially unfeasible, project recommendations, prompting some agencies (like the US OMB) to revise rates upward for balance.

Key Examples & Trends

* Stern Review (2006): Famously proposed a very low rate (1.4%) for climate change.

* UK Green Book: Historically recommends a declining rate, starting around 3.5%.

* US Guidance: Has shifted, with recent revisions favouring slightly higher rates than previous analyses which are deemed too low, to better balance future benefits and current costs.

* Other Countries: A range of rates up to 10% may be found.

Of course we’ve seen the flip side of this discounting in UK DB pensions, with lower and lower discount rates being used to justify shoring up accrued benefits by sucking excess capital out of sponsoring employers, capital which has then been invested in low return, low (or no) growth assets like gilts and other bonds.

Yet other commentators on here like Jnamdoc and others have argued this is robbing future generations, rather than reflecting a moral obligation to them by previous generations.

And of course for its own (unfunded) pensions, our governments cling to higher SCAPE discount rates to understate future obligations, as has often been criticised by Allan Martin and others on here.

You pays your money (or your taxes) and you (or our governments) takes your choice (or chances)?

Re setting the SCAPE discount rate for unfunded public service schemes.

Before the 2010 review, this was actually based on the (then) Green Book approach (ie the Social Time Preference Rate). Since then, it has fallen precipitously at every review (from memory – from RPI +3.5% to CPI +1.7% – firstly by basing it on long-term GDP growth and subsequently by the OBR downgrading that assumption).

So governments can’t be accused of clinging to higher SCAPE discount rates.

But the more important point is that it doesn’t really matter either way.

Lower discount rates do matter in some very important ways (eg when calculating transfer values for members’ divorce cases, deciding what members should pay for added pension, setting the price for non taxpayer funded employers to participate in these schemes). But it has only a muted impact on public finances overall, largely because higher employer contributions are paid to … Treasury who therefore have additional funds to allow them to compensate taxpayer-funded organisations for those increases (which they’ve invariably done).

Or, as the OBR explains much more helpfully:

Before the 2010; review of the SCAPE rate, a review of the Green book approach would have had implications for public service pension schemes (but not so much for public finances).: For now there’s no direct link between them (but these things tend to move in cycles).

Thank you, Neil, for that helpful link to the OBR’s attempt to pull the wool over my eyes when it comes to unfunded public sector pensions. The OBR even use a perverted sense of “fiscal illusion” at one point, accusing the ONS of misleading some of us.

Thanks to Keating & Clacher, readers of these blogs tend to have more sympathy for ONS numbers over those provided by other agencies.

If I may, I’ll quote selectively from parts of that OBR brief:

Unfunded public service pensions include central government pay-as-you-go schemes (the largest of which are the Civil Service, National Health Service, Teachers, and the Armed Forces) and locally administered police and firefighters’ schemes.

Public spending on these schemes is measured in AME (Annually Managed Expenditure) in net terms, total payments to each scheme’s pensioners less total pension contributions from public sector employers and current employees.

The OBR say

“unfunded pension payments have decreased from around 0.4 to [0.1] per cent of GDP since 2010-11. This reflects a significant increase in contributions from increased DEL (Departmental Expenditure Limits) spending announced in the March 2020 Budget”

and subsequent Budgets.

Interesting use of square brackets by the OBR in their 0.1% of GDP estimate, or maybe it was intended to mean -0.1%?

Square brackets usually indicate provisional estimates which need to be re-checked. The OBR seem to be confusing percentages and money values? GDP is a very big number from which to derive percentages, but I’m sure that’s deliberate.

In the OBR’s March 2025 forecast they expected unfunded public sector pensions spending costs in 2025-26 to total a surplus of £0.1 billion.

In effect they’ve switched the previous deficit within AME of pensions payments compared with contributions to a “surplus” by increasing Departmental Expenditure Limits, which aren’t included in AME.

Private sector employers would  love to be able to account for their pensions costs as simply the net between pensions in payment and contributions, but the elephants in that room (as it surely is also for unfunded public sector pensions) are the active and deferred member final salary and/or career average benefit obligations which are both increasing year-by-year.

In their most recent November 2025 forecast, the OBR say for 2025-26 to 2030-31 total spending is to rise by 1.0 per cent of GDP in 2025-26, primarily due to (yet) higher DEL, welfare and debt interest spending.

Over the next five years after that, spending is forecast to fall by 0.7 per cent of GDP, mainly reflecting a decline in RDEL [Resource Departmental Expenditure Limits] falling by 0.5 percentage points, and in other spending areas, which mainly reflects time-limited spending items that are set to come to an end over the next couple of years, such as the Infected Blood and Post Office compensation schemes, and a RISING SURPLUS (emphasis added) in unfunded public service pension schemes.

In the earlier March report, OBR had said net public sector pension spending was forecast to move from a surplus of £0.1 billion in 2025-26 to a surplus of £3.6 billion in 2029-30 as scheme receipts grow more quickly than scheme expenditure on average due to forecast increases in public sector earnings combined with higher employer contribution rates implemented from 2024.

That’s feasible, I suppose, if you’re only comparing annual pensions in payment with annual contributions.

As a percentage of GDP, unfunded pension payments within AME are said to gradually fall to -0.1 per cent by the forecast horizon.

So that’s all right then.

Where’s Allan Martin when we need him?