THE true size of Britain’s public sector pensions liability has risen above £1,000 billion as officials mask the extent of the problem, a report out today claims.

The £1,025 billion figure that the report gives as the liability is equivalent to 80 per cent of gross domestic product and is more than double the size of the national debt. It represents the amount for which the Government would be liable if private-sector accounting were used to calculate its pension obligations to public-sector workers, the report says.

The growing size of the Government’s liabilities is revealed in a report by the Institute of Economic Affairs (IEA), the free-market think-tank. It is double the Treasury’s figure of £530 billion, and much higher than the £817 billion estimate that the IEA produced last year.

Neil Record, a former Bank of England economist who wrote the report, said that the figure had risen because long-term real interest rates were exceptionally low. Low returns on capital meant that the Government should be setting aside more in its calculations to cover future costs.

However, by using too high a discount rate in its sums, the Treasury was able to undercharge state employers, such as the NHS, for their pension contributions — leaving more money for current improvements to public services but obliging future taxpayers to pick up the tab.

Mr Record added that high public sector pay rises, particularly the Government’s settlement with doctors and nurses, had driven up the true cost of final-salary schemes.

He said: “The Treasury is taking on responsibilities without really knowing how onerous these obligations are.”

David Laws, the Liberal Democrats’ pensions spokesman, said: “This is a time-bomb to the extent it threatens gobbling up in the future a disproportionate amount of taxpayers’ money that could well be spent on other areas that are greater public-spending priorities.”

However, a spokesman for the Treasury said: “Following international best practice, the Government uses the same accounting standards to calculate the public sector pensions liability as private sector pension funds. However, what matters is the annual cash requirement to pay pensions benefits, which remains fully affordable.”

The figure could become a hot issue if the Office for National Statistics (ONS) proceeds with a plan to include the unfunded liability in the National Accounts. The ONS is considering international plans to revise national accounting standards to include such a measure, although change is unlikely for several years to come.

The study also claimed that the Government makes new pension commitments to public sector workers each year worth more than £40 billion. It said that the cost of meeting the public sector pension commitments already made will peak at £90 billion a year in 2045.

Philip Booth, of the IEA, said: “People who are currently too young to vote will bear the greatest costs. This is not a legacy one generation of politicians should leave to their children.”

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