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Wednesday 28 June 2017

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EU pensions liability ‘burdened with considerable uncertainty’ - Bruegel

Written by Natalie Tuck
17/02/17

Estimations of the European Union’s €63.8bn pension liability are “burdened with considerable uncertainty”, according to think tank Bruegel.

It believes that using a different ‘reliable’ calculation, the pension liability would be €43.1bn. In a blog post, published on its website, the think tank noted that the EU balance sheet includes an estimate for the present value of pension and sickness insurance liabilities at €63.8bn. This figure which remained largely stable at around €35bn from 2005-2011 has almost doubled since then.

It stated that the number of EU officials contributing to the pension scheme increased by only 8 per cent from 2011-15, so increased employment cannot be the main reason for the increased pension/sickness liability.

Bruegel explained that the increase in the pension scheme is due to a large fall in the discount rate used to calculate the present value. It noted that this discount rate may increase in the coming years, which will lead to a fall in the present value of pension/sickness liabilities.

Due to low interest rates, the discount rates used on the EU balance sheet is at a low 2 per cent, however, the average nominal discount rate used for employee contribution rate calculations is 4.8 per cent. In addition, the different consideration of inflation also leads to differences, so the real discount rate, which is actually used in the calculations, is much lower for the EU balance sheet calculations (0.6 per cent) and for the employee contribution rate calculations (2.7 per cent).

Therefore, Bruegel noted that the present value of the same liability (future pension and sickness insurance payments related to EU officials) looks much larger in the EU balance sheet calculations (because of the lower discount rate) than in the EU employee contribution rate calculations (because of the higher discount rate).

It explained that if the EU actually used the 2.7 per cent discount rate, the pension/sickness liability would be much smaller than €63.8bn. Bruegel said it was limited in making a precise calculation, due to lack of data, but assuming a one-time ‘big’ liability in 19 years from now (when the existing discount rate matures) it can calculate the hypothetical value of the liability in 19 years times and then discount the value with the 2.7 per cent to an alternative estimate of the present value.

Therefore, Bruegel said its calculation shows that a present value of €43.1bn would be consistent with a 2.7 per cent discount rate when the €63.8bn present value is consistent with the 0.6 per cent discount rate.



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