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Inflation – The States Employee Pension Fund – A Huge Risk to the Island’s Finances
The first paper that GPEG released upon launch, in December 2020, was entitled Beware of the Hole! It was intended to inform debate as to the current arrangement and risks in the public sector pensions in the Bailiwick.
Today they have launched a further report here looking at the impact of increased inflation expectations on the States pension scheme and the significant risk that it poses to the Island’s finances.
“At 31st December 2019, the civil service pension funds had liabilities of some £2.6bn and investments of £1.5bn. £1.1bn is therefore the unfunded deficit which the taxpayers of Guernsey will have to deal with.
On 31st December 2020, the pension fund’s liabilities had risen to £2.8bn and the assets had risen to £1.6bn. Therefore the unfunded deficit is now showing at £1.2bn. So, in 2020 the taxpayers saw their exposure rise by some £100 million. This is not accounted for in the States’ financial accounts. It’s obviously bigger than the £80m or so, bandied around as the annual cash shortfall we have, but you will not find any consideration of this massive liability in the 2022 budget or the States Funding and Investment Plan. Yearly movements in this deficit are easily half the annual budget of the States.”
They go onto comment:
“There is a requirement for triennial reviews of the funding of this plan (done by BWCI in Guernsey historically) but there has been no published review since the 2016 review. The 2020 States Accounts also stated there would be a report by the end of 2021.” Why the delay?
Their headline findings of this report are:
• “The recent rise in inflation will add hundreds of millions, and maybe billions, to the amounts due to be paid out as pensions to States Employees – dwarfing most other financial numbers on the island.
• If inflation goes to the projected 7% p.a. (note even higher forecasts now from the Bank of England) and stays there for a year and then, instantly and magically, returns to the States prior prediction of 2.7% p.a. then that alone would add £100m to the payments made to the State’s employees and pensioners. The Guernsey inflation index (RPIX) is already at 4.6%.
• Every year that passes with higher inflation will merely increase the amounts payable to pensioners – there is no obvious limit to the obligation to fund that.
• A typical private sector defined contribution pension scheme will generate less than one third the indexed pension that a Guernsey civil servant will get on a similar salary.”
Their recommendations include:
“1. Some of the pensions are paid to people living overseas and paying tax on the pension in another country. A fixed withholding tax would keep that tax in Guernsey and provide a modest amount for the States’ coffers. Most people affected by this would be able to get the cost back in reduced local taxes.
2. Increase Employee Contributions.
3. For substantial impact, close the inflation linked defined benefit scheme and CARE schemes for future service and replace the schemes with a defined contribution scheme as the private sector generally has.
4. The States have some discretion to fix the method and limits of future inflationary increases in pensions. They could at least cap their exposure at say 4%.”
GPEG do acknowledge that:
“There will be obvious employer/employee issues which will not be easy. Anything that affects the current entitlements of staff, especially those who have left or retired would be called, not without justification, as breaking a promise regardless of the strict legal position.” GPEG also go on to review the “cap” that is in place per the pension scheme rules and concludes that there is “no real protection”:
“In summary the taxpayer will bear the investment return risk on past service liabilities, the investment return risk on future service liabilities, the cost of higher future inflation, the risk of actuarial process change and the risk of improved life expectancy. Any increase in liability due to these factors will be paid for by the taxpayer.”
Their analysis concludes:
“Letting this carry on would be a real failure by the States of Guernsey. The States need to responsibly deal with this massive problem that needs immediate resolution and if left will just keep growing.”
For further comment contact Jon Moulton at info@gpeg.org.gg
