Brexit “divorce costs” just increased without prior notification or discussion with the UK.

Brussels and Birmingham

Professors John Clancy and Alex de Ruyter, of Birmingham University Centre for Brexit Studies, published the results of their work through the detail of the European Commission 2017 accounts, published last week.

Hidden away in there was what they describe as a “bomblet”.  The Brexit bill has just soared upwards.

They suggest that the UK needs urgently to ask some tough questions of the EU Commission about their figures.  According to Clancy: “questions which, to be frank, the Treasury and our negotiators should have been asking a long time ago.”

The liabilities included in the accounts for the EU’s civil service Pension Fund liabilities have just been re-calculated upwards to a staggering €73 Billion.  As the UK leaves the EU in March 2019, there is a commitment to pay its share of that huge figure - one way or another.  And it represents one of the biggest items on the Brexit bill.

Nobody has asked serious basic questions about this huge figure - especially as: “there is actually no pension fund in existence.”

Like all public sector institutions, pensions are a “pretend” fund for accounting purposes.  In reality, they pay out monthly pensions using received monthly contributions - and balance up at year end.  If there’s a shortfall the treasury plugs the gap - and if there’s a surplus (there usually is) the Treasury “gobbles it up.”

But the 2017 EU accounts are suddenly show a shortfall of €73 Billion.  Ostensibly, how much the EU is committed to pay today’s EU civil servants and its calculation of what it expects to have to pay those same civil servants over the next few decades.

5 years ago this stood at €42 Billion.

Question 1 that UK negotiators should ask: why is 2017 double the EU Pension Fund bill compared to five years ago?  Is this more than simply “unfortunate timing” for the UK?

Question 2 is why the vast increase from just 2 years ago?  Is the EU commission or its negotiators working on a strictly actuarial basis?  If so, what happened this year to end up with such a shock increase in liabilities at year end?

Question 3 is whether the EU anticipates the figures – upon which the UK divorce bill be based – to increase further on 31 December 2018?  If we do, then we should start seriously to question the entire basis for the EU’s figures.

The expert judgement is that these quickly inflating figures need to be addressed.  They believe that the EU has got its figures wrong.  It has failed to reflect in its calculations the actual market conditions that led to the €73 Billion calculation.

When the EU calculates its accounts, it uses bond figures prevailing at the time to set the Discount Rate.  This interest rate is the biggest factor when it calculates its final pension fund liabilities.  It values future liabilities and cash flows at today’s prices by discounting a certain amount off the future big figure every year and calculates backwards to today.  Historical discount rates have settled at around 7% for funded pension funds.

Perhaps the most important question of all: “Why has the EU used a nominal discount rate of only 1.9% to come up with the bill?”

This figure when combined with inflation in the EU is the key driver of why the bill has sky rocketed in the couple of years.

Why does this matter to Brexit right now?  Because the EU wants the UK to pay them a share of the liability as we “shut the door and leave”.

This immediate issue for the UK Treasury is about how pension liabilities are calculated.  So far, the panel investigating the issue has not found any evidence that HM Treasury and thence our Brexit negotiators have, so far, challenged the figures.

With negotiations due to be finalised by October 2018, the EU “appeared to have pulled a ‘fast one’ at exactly the right time - the end of July 2018!

John ShuttleworthComment