17 February 2017

Bruegel: The Brexit bill: uncertainties in the estimate of EU pension and sickness insurance liabilities

Pension and sickness insurance liabilities for EU staff could be an especially contentious part of negotiations on an EU-UK financial settlement. This post looks behind the calculation of the alleged cost of pension benefits and concludes that it may be less than half of what it seems.

Key points

• The balance sheet of the European Union includes an estimate for the present value of pension and sickness insurance liabilities related to EU officials, which remained broadly stable at about €35 billion in 2005-11, but has almost doubled to €63.8 billion in 2011-15.
• The number of EU officials contributing to the pension scheme increased by only 8% from 2011-15, so increased employment cannot be the main reason for the increased pension/sickness liability.
• The main reason for the doubling of the pension/sickness liability is a large fall in the discount rate which is used to calculate the present value. The discount rate may increase in the coming years, which will lead to a fall in the present value of pension/sickness liabilities.
• Parallel with the doubling of pension/sickness liabilities in the EU balance sheet, the contribution rate payed by EU officials from their salaries has actually fallen. While the same actuarial method is used to calculate the balance sheet liability and the employee contribution rate, the underlying assumptions differ enormously.
• It should be a common interest to find a “reasonable” way of calculating the pension/sickness liability in the Brexit financial settlement.
• Only two thirds of the “reasonable” value should be considered as a liability to which the UK should contribute, because one third of pension costs are paid by EU officials. If the assumptions for EU employee contributions are used for Brexit bill calculations, then the UK should pay a share of a liability of approximately €29bn.

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