THE Government is understating public sector pension liabilities by as much as £180 billion, according to a senior actuary.

Future pensions owed to three million civil servants, teachers and health workers are put at £440 billion in today’s money in official accounts. However, the fairest figure is in fact £620 billion, according to Douglas Anderson, head of public sector consulting at actuaries Hymans Robertson.

The gap has widened dramatically in recent months alongside plunging bond yields and is equivalent to £60,000 for each pension fund member or roughly 1½ times the entire annual take from income tax.

Mr Anderson said: “If you want consistency in government accounting, the liabilities should be £180 billion higher.”

The shortfall was because of a highly favourable way that central government pension funds are allowed to account for future liabilities.

Unlike other pension funds, central government schemes use a formula of inflation plus 3.5 per cent to discount future liabilities back to the present day. This is being inched down to 2.8 per cent plus inflation for pension fund years ending on or after March 2006, but is still extremely high.

The formula has the effect of shrinking future liabilities when discounted back to the present day — underplaying the cost to taxpayers over the next few decades.

Unlike normal pension funds, which are funded by employer and employee contributions, central government schemes are unfunded. There is no money in the kitty and pensions have to be paid entirely out of future taxation.

Private sector schemes and local council schemes are obliged to use the yield on AA-rated corporate bonds to determine their discount rate. This is much lower than the discount rate used by central government schemes and the gap has widened even further in recent weeks as UK bond yields have collapsed.

If the central government schemes were forced to use the same formula as private or local government schemes, their total deficit would be £580 billion, or £140 billion more.

Mr Anderson said that they should go even further and logically should use the yield at which the Government can issue long-term debt, currently about 1 per cent over inflation. This would value liabilities at £620 billion.

Mr Anderson said: “Whilst the Government’s shott-term finances look rosier because it can raise new capital more cheaply, the rise in the value of the pension liabilities on its balance sheet is a sting in the tail.”

A Treasury spokesman said: “We take advice on the discount rate from the Government Actuary’s Department. The actual cash requirement to pay pensions does not change just because you change the discount rate.”

The Treasury is expected to publish updated figures for the central goverment pension schemes this week.

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