Tuesday, March 06, 2007


I wrote a short piece the other day about the way that numbers are presented affects the way we perceive them. This was prompted by an almost throwaway article in the paper noting how the NHS Pension Scheme liabilities had increased by some £37 Billion over the last year to a new total of £165 Billion, presented in a way which made the difference look like “rounding”.

The more you ponder on this, the more you get worried by it. The presentation is one thing, but the staggering size of the amount of money involved is a much more serious issue. I know enough about the maths of how Pension Schemes work to know that I don’t know enough about it. When their clients so demand, the actuaries who do these calculations can call on almost David Blaine-like powers involving lots of smoke and quite a few mirrors to make numbers “sit up and beg” for them.

They use a discount rate which reduces future pension costs back to present day figures to calculate today’s liabilities. One of the changes the actuaries apparently used in increasing the NHS Pension scheme liabilities for 2005-6, was to reduce the Discount rate from 3.5% the previous year, to 2.8% for this year. Just changing that percentage by that seemingly little amount can have staggering effects on the amount of money they say is needed today. The only problem with bringing it down to 2.8%, is that for most sponsored schemes in the private sector, that percentage would typically be 2.0%. If you factor that number into the maths, the liabilities would grow, according to Watson Wyatt, a very respected firm of pensions experts, by a further £28 Billion to £193 Billion.

There are a myriad of other factors which must be fed into the maths, all of which can change the final number dramatically. Try Life Expectancy for instance, which is changing at a rate none of us, including actuaries, can predict. It seems to have increased over the last couple of decades at a faster rate than we ever imagined, partly due, you may note rather elegantly, to the efforts of some of the people in the NHS Pension Scheme.
Simple maths says to us that, if a scheme supports 1.26 million members, and it has a total liability of £165 Billion, then each member’s “pot” is around £140,000, which is supposed to last around 25 years – the predicted lifespan of someone who is 60 when they start to take their pension. That’s around £6,000 per year on average. If they get the average age of mortality wrong by just one year, and that’s actually very easily possible, then the calculation is wrong by nearly £1 Billion. It's actgually impossible to calculate what the true liabilities of such a scheme are, but you can guarantee that, whatever number you choose to think of, the final one will be higher!

All these figures seem horribly large, and almost beyond comprehension. The really worrying thing is that the NHS scheme is UNFUNDED – meaning that the Government has put nothing, absolutely nothing away anywhere to pay for it. Unlike all Private Pension scheme, there are no Assets anywhere which have been "ring-fenced" to pay these enormous sums. They have made this colossal commitment to 1,260,000 people, and the only way it gets paid is if you and I pay taxes to support it, for as long as we live.

And that is only one scheme, albeit the biggest, which is handled by the Government in this way. If you take all the state schemes where the taxpayer has been forced, through payment of taxes in the future, to underwrite these schemes, the total amount we will have to pay is around One Trillion Pounds. That’s only three little words, but numerically it looks like £1,000,000,000,000, or a tad more than the whole of this country’s Gross National Product for a year – just get your head around that if you can.

It does rather make the efforts by Gordon Brown to diminish the pension of anyone in the Private sector look very, very sordid and very, very unfair.

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