Unfunded public sector pension liabilities and debt in national accounts

It has been argued that public sector pension liabilities are “the UK’s second national debt”, and that the government should be transparent about it and account for this liability in its published debt figures. One consequence of reclassifying the estimated £1 trillion liabilities as “debt” would be a doubling of the official debt stock and hence also the debt to GDP ratio.

Commentators have also expressed views on what to do with this liability, ranging from curtailing future increases by making public sector pension promises less generous to fully funding the currently unfunded liability.

This briefing note discusses how the internationally-agreed System of National Accounts (SNA) treats public sector pension liabilities and what recent developments have taken place in that area. The note shows that the current version of SNA and its European version, the European System of National Accounts (ESA), exclude public sector pension liabilities from government debt but that there are also moves to greater disclosure. The fact that pension systems are so diverse across countries and that opinions differ on how to treat pensions in accounting means that progress has been and will continue to be slow.

The note also discusses whether fiscal policy should be predominately based on the public finance measures of debt and deficit, which exclude any consideration of the future. In most countries this remains the case. However, there have also been efforts to increase the role of future spending and revenue trends in shaping today’s fiscal policy settings.