The government has been accused of misleading parliament and the public over the taxpayer cost of public service pensions, after analysis from the Institute of Economic Affairs (IEA) estimated an unreported annual cost of around £57bn.

The IEA's report, The Great British Rake-Off, alleged that the government has been running “two books of accounts”, which has led to a “general misunderstanding” of public sector pension costs.

It explained that members of parliament and the public are only informed of the discretionary cost, which is based on an assumption around investment returns rather than any market rate.

The true cost, however, which is calculated using an international standards for pension schemes IAS19, was reportedly declared “only deep in [the government's] pension accounts”, which IEA argued made it “understandable only by experts”.

The report revealed that the difference between discretionary and official costs can be “huge”, with the NHS Pension Fund, for instance, reporting a discretionary pension cost as a percentage of salary of 30.4 per cent in 2021, while the official cost was more than double this, at 62.2 per cent.

The IEA warned that this was a problem on "an enormous scale with very long horizons", also pointing out that the total unreported cost of £57bn is more than the amount spent on police or the Ministry of Defence, and represents around 30 per cent of the public sector payroll.

It also suggested that the approach taken by the government has “subverted the concept of independent reporting” and brought “UK public sector pension accounting into disrepute”.

In particular, the report pointed out that the IAS19 measure is the same method that UK regulation requires for private sector pensions, suggesting that the government should use this measure to ensure conformity within UK pensions law.

The IEA argued that no sensible debate about the future of public sector pensions can take place and nor can the labour market operate transparently, given that costs between private and public sector pensions cannot be compared on a common basis.

Intergenerational fairness concerns were also raised, as IEA stressed that these costs will have to paid by future generations of workers, as public sector pensions are not funded.

In light of the disparity in cost estimations, the IEA has challenged the government as to why it considers it "appropriate to encourage an increasingly wide gap between public and private sector pension provision".

IEA chairman and report author, Neil Record, commented: “The UK government employs 5.7 million employees, and offers almost all of them very generous, heavily subsidised, pensions.

“For fairness; for the labour market to work properly; and for younger taxpayers to be accurately told how much they owe the old, it is vital that the government uses internationally agreed standards to report these pensions’ costs.

“It does not do so, pretending to the electorate and to parliament that their pensions are worth about half their true value. The government is marking its own homework, and claiming that wrong answers are correct. This is morally and financially wrong, and must stop.”

HM Treasury has been contacted for comment.

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