Experts question PPI over pensions By Ellen Kelleher

From The Financial Times
By Ellen Kelleher
December 2, 2012

Thirty pension experts from around the globe have written a letter to a UK think-tank to question its support for the UK Treasury’s method of calculating the future cost of public sector pensions.

Figures from the UK, Australia, the US and the Netherlands have sharply criticised a decision by the Pensions Policy Institute to back the government’s new “discount rate” of consumer price index inflation plus 3 percentage points, which it is using to value the pension promise being made to state employees.

The signatories argued that future pension liabilities should be measured using a discount rate based on the UK’s index-linked gilt yield, a far lower measure that would significantly raise the government’s pension liabilities.

They called for the PPI to address the discount issue and publish costings based on the ILG approach.

“It seems clear that the PPI calculations understate the value of public sector pensions to individual employees,” wrote the signatories, headed by John Ralfe, a pensions consultant and including Professor Zvi Bodie of the Boston University School of Management.

The Treasury and PPI argue that CPI+3 percentage points equates to likely future nominal economic growth, and thus reflects the ability of future taxpayers to fund pension payments.

Read the full article at FT.com.