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Improving the landscape of whole of government accounts

IPSAS 42 filled a gap in the literature, providing much-needed guidance on social benefits spending, equivalent to 20% of GDP across all OECD countries. Alan Bermingham of the Chartered Institute of Public Finance and Accountancy (CIPFA) reviews the significance of the new standard for the UK public sector.

In January 2019, the International Public Sector Accounting Standards Board (IPSASB) issued its new accounting standards, IPSAS 42, providing the answer to life, the universe and everything.

I jest, of course. Douglas Adams had little, if not nothing, to do with the development of the new accounting standards.
Their actual remit, though no less important, covers social benefits including the recording of liabilities for cash transfers, such as state pensions, that are not currently included in, for example, the UK government’s financial statements.

It is important that financial management professionals understand how the new standard will affect the nation’s financial position, and its broader implications for intergenerational inequity.

A recent report on intergenerational inequity from think tank Bright Blue cast a spotlight on the state of public finances and the implications that financial positions have for future generations. The report highlights that numerous unfunded ‘promises’ are listed in the Whole of Government Accounts (WGA), including local government pensions, public finance initiative contracts and nuclear decommissioning provisions.

Further, one of the report’s five recommendations suggests that “the UK’s WGA balance sheet should include a liability to represent future State Pension payments” in order to more accurately reflect future costs to taxpayers and improve transparency.

The state of UK public finances has deteriorated in recent years. Separate research from the International Monetary Fund showed that in terms of net worth, the UK public sector balance sheet ranks second to last. While this is in part due to banking bailouts during the 2008 financial crisis, UK government borrowing activity has also increased in recent years, while public sector employees’ pension liabilities have grown.

In the future, these liabilities will have to be paid. Ultimately, that means the financial burden will fall to subsequent generations if mitigating actions are not taken. 

Strategic Decisions

In many ways this scenario demonstrates the value of WGA, as more strategic decisions can be made to improve the stewardship of public finances over the long term – which is the focus of the WGA’s structure to begin with.

Recent changes to public sector employees’ pension benefits to reduce overall future liabilities is just one example of what these strategic decisions may look like. In this particular case, Bright Blue’s report highlights that state pension liabilities would add £4.2trn ($5.18trn) to the UK’s liabilities if included in the WGA, while current net liabilities are £2.4trn. Industry professionals may be asking if IPSAS 42 will solidify this shift of liabilities.

In short, the answer is no. IPSAS 42 is applicable from January 2022, at which time the Financial Reporting Advisory Board will assess how applicable this new standard is for the UK’s financial reporting.

Should IPSAS 42 be applied, the general approach to recognising liabilities for state pensions will change. Under the new accounting method, the liability will be recognised when an individual reaches retirement age.

Furthermore, the satisfaction of the eligibility for each state pension payment is considered a separate event, despite the fact that eligibility validation may take place less frequently. Therefore, the liability to be recognised at the end of the year is for the next payment only. Ultimately, the adoption of the new framework means that £4.2trn of liabilities would be recognised on a separate time horizon, and therefore excluded from the state balance sheet.

If implemented, IPSAS 42 will add significant value to the information contained in WGA, and will only serve to strengthen its value to strategic managers of government finances. Improving the management of both the government’s liabilities while not forgetting assets that total £2trn, will be vital to ensuring long-term improvements to the government’s financial position and broader public sector strength. 

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