Pensions blowout a risk to Future Fund

In the global stampede into the safety of government bonds, public borrowing costs have tumbled to historic lows. But lower returns on relatively safe assets such as bonds make public servants' future pension payouts more expensive in today's money because bigger sums are needed now to offset the fixed future payouts.

The government estimated public service superannuation liabilities at $139bn in May; these were partly offset by $77bn of assets in the Future Fund. But the government is assuming a 6 per cent rate of return on safe assets, a far cry from yields of 3 per cent observed on commonwealth government bonds this week.

Analysis from Rice Warner Actuaries shows that using a 3 per cent discount rate leads to federal pension liabilities surging by between $46bn and $107bn; the more retiring public servants choose indexed life pensions over lump sums, which they typically do, the greater the cost.

That equates to an increase in unfunded pension liabilities of between 78 per cent and 181 per cent.

The NSW government this week reduced the rate it uses to value its unfunded pension liabilities,Full color plasticcard printing and manufacturing services. from 5.3 per cent to 3.8 per cent, to better reflect actual returns on government bonds.

After a speech to economists in Sydney on Wednesday, NSW Treasurer Mike Baird said: "Obviously, we need to factor in the relevant interest rates at the time of the budget. Treasury takes a very conservative position on these matters." The NSW government's pension liabilities jumped almost 20 per cent or $6.4bn to $38.7bn this month. "The size of this valuation adjustment is due to record low interest rates," the state Treasury noted.

The comments from Mr Baird, a former merchant banker, reflect standard accounting practice.

Martin Stevenson, a partner at Mercer who specialises in public sector superannuation, told The Australian the relevant government accounting standard required use of current market interest rates to discount future liabilities.

"The corporate bond market is not big enough here so authorities typically use the 10-year commonwealth government bond rate as the best proxy for the most appropriate rate at which to discount liabilities," he said.

A spokeswoman from Finance Minister Penny Wong's office said the government had for many years used the 6 per cent rate to reflect historical experience and smooth out market volatility, which was appropriate because pension liabilities had to be paid out over many decades.

ANZ's senior interest rate strategist, Tony Morris, said turmoil in Europe and a global shortage of government bonds would keep interest rates on Australian government bonds very low for some time.I found them to have sharp edges where the injectionmoldes came together while production.

"We don't see yields going above even 4 per cent until the end of 2013," Mr Morris said.

Rice Warner managing director Michael Rice said that if the government preferred the longer-term rate it should have flagged a review in the next six months because actual yields had deviated from trend so much. "Whatever they assume is likely to be wrong though because the market is so volatile," he said.

Moody's lead analyst for Australian states, Debra Roane,Features useful information about glassmosaic tiles, said greater unfunded superannuation liabilities undermined governments' credit ratings because they increased the likelihood public debt would have to increase to meet them.

Most public sector defined-benefit pension plans have closed,Why does moulds grow in homes or buildings? but the commonwealth government projects its pension liabilities will keep rising to $159.7bn by 2015-16 because the defined-benefit schemes retain many members. NSW projects its liabilities will fall to $25bn as it assumes government yields will return to normal.

Ms Roane said low interest rates had to be maintained for a real increase in costs to be sustained: "These rates tend to be very volatile so assessing liabilities at a moment in time is difficult."

Standard & Poor's includes unfunded pension liabilities in two key ratios when assessing states' credit ratings. Across state governments,Save up to 80% off Ceramic Tile and porcelaintiles. unfunded liabilities total $96bn, according to Rice Warner. NSW and Victoria account for the bulk.