Public sector pension bill exceeds UK GDP for the first time

The cost of pensions for millions of public sector workers including civil servants, doctors and teachers rose by £116.7bn in the 2020-21 financial year. 

This takes the total to £2.3 trillion, but at the time UK GDP was just £2.1 trillion.  

The four biggest unfunded schemes are for the NHS, teachers, civil servants and the armed forces. 

Simon Kew, head of market engagement at Broadstone, said: “Administering, operating and paying out to beneficiaries within these schemes remains a heavy burden for the economy to bear."

“The taxpayer is on the hook should there be any shortfall in these schemes – and currently foots about 75 per cent of the bill from the four largest pay-as-you-go schemes.” 

Laurence O’Brien, an economist at the Institute for Fiscal Studies (IFS), said: "The figures… highlight that the pension promises made to public sector workers are substantial, even if these will be paid over the course of several decades rather than in a single year.  

“The increase in the liability between 2019/20 and 2020/21 was driven by a fall in the rate used to discount future payments, underlining that these future pension payments will be more costly to make in an economy with lower growth and lower rates of return." 

Pension divide 

In a March forecast, the OBR estimated that unfunded public sector pensions spending in 2023-24 would total £7.9bn. That represents around 0.7 per cent of total public spending and is equivalent to £276 per household. 

Kew added: “The public sector remains unique in continuing to welcome new members to its pension schemes while most private sector plans are closed to new members. It suggests the size of the bill will continue to grow and serious conversations will need to continue around their long-term viability. 

“The good news is that the funding improvements we have seen throughout the sector since 2022 should significantly reduce the liabilities held within these schemes, increasing their sustainability at least in the short term.”