From Mr John Ralfe.

Sir, Your editorial “The pension divide” (November 28) emphasises the importance of moving public sector pensions from defined benefit to defined contribution, in line with changes in the private sector.

Private sector companies started to move from defined benefit pensions once FRS 17 accounting, introduced in 2000, required them to report the real economic cost against AA corporate bonds. Seeing the annual costs of new pension promises, and total pension liabilities, in published accounts was a wake-up call for management and shareholders. But public sector employers – NHS trusts, education colleges and government departments - continue to use cash accounting for pensions, so their real annual cost, and total liabilities, remain hidden.

For 2008 the official cost to the taxpayer of new pension promises is about £15bn, the annual cash contribution required from employers. Cash contributions are rightly set by discounting expected pensions at the index-linked gilt rate - pensions are government-guaranteed and inflation-linked - but the rate used is not the market rate but much higher at 3.5 per cent after inflation, fixed by the Treasury in 2001.

The real public sector pension cost for 2008, using the market index-linked gilt rate of 1.2 per cent after inflation, is about £30bn, twice the official cost. The extra £15bn will be paid by future generations of taxpayers.

Since the discount rate does not move in line with market rates, the official percentage cost for public sector pension cost has, conveniently, not increased since 1997, despite the dramatic fall in interest rates following Bank of England independence. As for the total value of public sector pension liabilities, the 2007 accounts of individual schemes show FRS 17 liabilities of more than £800bn, a figure not included in any Treasury document on overall government borrowing.

A proper political debate on public sector pensions requires straightforward clarity on costs. Getting such clarity is technically easy, but finding the necessary political will in government or opposition is more difficult.

John Ralfe,
John Ralfe Consulting,
Nottingham, UK