Methodologies for advance funding of pensions are covered extensively in actuarial training programmes worldwide. This paper will cover the alternative of financing pensions on an unfunded basis, often used in the public sector.

The paper will explain the techniques applied to the long term financial management of the unfunded arrangements for public service employees in the UK.

At present, the 7 largest public service pension schemes have a total membership, comprising 5 million active employees (around one-fifth of the UK workforce) and a total membership – active employees plus retired members currently receiving pensions and former employees entitled to deferred benefits -- of 12 million, (around a quarter of the adult population of the UK). Those 7 schemes cover the National Health Service, Teachers, Police, Fire Fighters, Armed Forces, Civil Service (Public servants in Central Government), and Local Government. All of the schemes listed, except for Local Government, are financed on an unfunded basis.

The paper will cover the following areas:

„h A description of the financing arrangements, including the cash flows, and actuarial techniques used to assess contributions from employees and employers, highlighting the fundamental differences between financing on a pay as you go basis as opposed to traditional funding commonly found in private sector pension provision

„h How the long term costs are monitored within government

„h The factors driving the case for reform of public service pensions

„h The findings (published in March 2011) of the Independent Public Service Pensions Commission, chaired by Lord Hutton

„h How the Hutton reforms have been implemented, and their impact

„h Lessons learned

The aim of the paper is to share the UK experience with actuaries worldwide, since those charged with managing the public finances in many countries (many carrying material fiscal deficits) are already, or shortly could well be, facing similar challenges.