Economy and Infrastructure

Accounting will be key to tackling intergenerational equity

Alan Birmingham, CIPFA policy manager devolved governments, addresses a somewhat overlooked problem: intergenerational equity.   

As public sector employees’ pension liabilities continues to take off, intergenerational equity could be seen as a major issue for the United Kingdom. However, you wouldn’t know this looking at the nation’s balance sheet.

One reason is the UK’s Whole of Government Accounts (WGA) does not include state pensions. This in a sense seems at odds with a core purpose of the WGA, which is to give foresight, allow for more strategic decisions, and improve the overall stewardship of long-term public finances.

This issue was raised in a recent Bright Blues report that pointed out, despite recent changes to pension schemes to reduce state pension liabilities, if it were now added to the WGA there would be an additional £4.2trillion on top of current liabilities – far exceeding current net liabilities of £2.4trillion.

Rightly, the report points out that these liabilities will need to be paid for by someone, and without taking any mitigating action, it will be future generations who will shoulder the burden.

This lead to a recommendation in the report that “the UK’s Whole of Government Accounts balance sheet should include a liability to represent future State Pension payments, based upon a realistic expectation of the future cash outflow, discounted using gilt yields.”

Interestingly, such a change could be on the way, with the International Public Sector Accounting Standards Board (IPSAB) issuing its new accounting standard covering social benefits (IPSAS 42 – Social Benefits), which would bring pensions into the balance sheet.

The standard is applicable from January 2022, so at some point the Financial Reporting Advisory Board (FRAB) to the Treasury will make an assessment of the applicability of this new standard to UK government financial reporting. But will it crystallise and add £4.2trillion to the state debts?

Well, taking a closer look, this is very unlikely. By applying IPSAS 42’s general approach to recognising liabilities for state pensions, the liability is only recognised when an individual reaches retirement age.

This means satisfaction of the eligibility for each state pension payment is a separate event, even though validation of that eligibility criteria may take place less frequently. So the liability to be recognised at the end of the year is for the next payment only.

However, while it may not reflect a full £4.2trillion liability, IPSAS 42 will have an impact by adding valuable information to the WGA, and strengthen the strategic management of public finances by helping government better recognise social benefits expenditure.

Improving management of both the government’s liabilities - and not forgetting UK assets, which currently amount to £2trillion - will be vital to ensuring long-term improvements to the government’s financial position and financial strength.

There are of course challenges ahead, with IMF also reporting recently that in terms of net worth the UK public sector balance sheet is second worst in terms of those assessed, with only Portugal having a lower net worth (both had liabilities outweighing their assets).

While adding the projected £4.2trillionn would be an overzealous accounting treatment, implementing IPSAS 42, and better recognising and managing the intergenerational equity being generated by social benefits, such as pensions, seems prudent.

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