Guernsey has a low-tax developed economy with a strong financial services sector and from that perspective is very similar to Singapore. Yet Singapore has probably the most successful economy in the world with Guernsey lagging far behind. I asked a Singaporean friend the reason for the significant differences, and the response was Singapore’s strong political leadership and their political system. We now have a new States Assembly and the subject of this article provides it with an opportunity to show its mettle and bring about important financial change.
Guernsey has circa £2.6bn. of reserves tied up in the Employees’ Pension Scheme and the Old Age Pension and Social Security Scheme. These are not invested in any way that benefits Guernsey, and they could all be released for capital infrastructure investments and for the benefit of the community as a whole.
The Guernsey pension schemes are defined benefit schemes which provide a prescribed amount of pension at retirement age. The pension under the Employees’ Scheme is service related, and the old age scheme is a flat rate scheme.
Defined benefit schemes are, in my view, the only true type of pension scheme. In the private sector the pension liabilities are supported by an investment fund and in the UK it is a regulatory requirement that a scheme must be 100% funded, with the employer being responsible for providing the necessary funding in excess of employee contributions.
Public sector defined benefit schemes very commonly have no funding behind them at all but operate on the ‘pay as you go’ basis where the public body meets the cost of paying the benefits above the employees’ contributions directly from revenue. The best example is probably the UK Civil Service Pension Scheme but public service pension schemes in countries such as France and Germany also operate on the ‘pay as you go’ basis.
The Guernsey Employees’ Pension Scheme is therefore fairly unusual in that it is fully funded and the latest figures I heard indicated that the assets cover 108% of the liabilities. The States’ Old Age Pension and Social Security Scheme operates on the ‘pay as you go’ basis but in practice the States holds earmarked reserves which cover, I am advised, around 50% of the liabilities.
The schemes do not need to be funded and in practice, if the present strategy persists, the reserves will never be spent. The States has many other future liabilities including a payroll of £300m.-plus for 5,000- plus employees, for welfare benefits, unemployment benefits, healthcare etc. They hold no separately identified reserves to cover these liabilities. Why should the pension schemes be any different?
The schemes could change to the ‘pay as you go’ basis with the state being legally obligated to meet the cost of each year’s pensions and any other scheme payments over the amount of employees’ contributions. There would be absolutely no risk to employees’ benefits. Guernsey has a high international credit rating and has never reneged on its financial obligations.
This change would enable the reserves to be released for capital infrastructure investment and investment in Guernsey generally.
The financial impact
Let’s have a look at some numbers.
The Employees Scheme
As contributions are received they are actually used to pay pensions in payment and any other benefits rather than disinvestment from the investment fund except to meet any shortfall. The figures are at March 2025.
Funds under management – £1.70bn.
Annual benefit cost – £89m.
Annual contributions – £54m.
Shortfall – £35m.
The Old Age Pension and Social Security Scheme
Social security contributions are also used to pay benefits rather than disinvestment except to meet any shortfall. The latest numbers I have are from the States Accounts to the end of 2023.
Investment reserves –£888m.
Pensions and any other benefits – £268m.
Social Security contributions – £229m.
Shortfall – £39m.
The investment reserves are part of the States general reserves but are earmarked specifically for the Old Age Pension and Social Security Scheme. The shortfall is met from the reserves.
The shortfall for both schemes will be met from investment reserves. Based on investment returns generally I would expect a compound annual rate of return of at least 5% per annum over the last 10 years – an average of around £130m. per annum
Releasing the reserves
By moving to ‘pay as you go’ the total amount of reserves that could be released is:
Employee Pension scheme – £1.70bn.
Old Age Pension and Social Security scheme – £0.88bn.
Total – 2.58bn.
Investment markets have generally been strong, and I am confident the total reserves that could be released should now exceed £2.6bn.
The reserves are not presently invested in any way to benefit Guernsey. I do not know the investment strategy but I would expect 90% to be invested in a combination of fixed interest securities (UK gilts, US treasuries and bonds) and international equities.
This needs to be put into perspective. By investing in fixed interest securities Guernsey is in effect lending money to other countries and companies to invest for their benefit. So, a country could use the funds for its ports, roads, airport expansion, hospitals etc.
In other words we are lending money for other countries and companies to use in a way which they consider to be appropriate for themselves in areas where much needed capital investment is needed in Guernsey.
In a recent paper I saw published by the Policy & Resources Committee it was estimated that outstanding infrastructure investment projects in Guernsey total over £1bn. but only £150m. is earmarked for capital investment. Releasing pension reserves could revolutionise Guernsey’s capital investment infrastructure.
In practice I would expect to see the Employees’ Scheme reserves released into general reserves and the earmarked reserves held for the Old Age Pension and Social Security Scheme to become available for investment in Guernsey without any restriction. The States will still have to provide for the shortfall between income and expenditure for both schemes but the reserves are not going to be released immediately and there will continue to be substantial investment income. In addition the strain would be relieved on the annual budget for capital infrastructure investment.
Additional infrastructure investment is a wonderful opportunity which also might relieve the strain on taxation generally. Guernsey’s finances are complex and while future tax rises are possibly inevitable my proposed change in strategy should be a big help in balancing the books.
The employees and unions‘ perspective
It is vitally important to consider the employees and union perspective. It is an educational process, but in my view a ‘win-win’ situation. Payment of pensions is unaffected and guaranteed by the state, the change helps control taxation and enables substantial capital infrastructure investment in Guernsey. I would like to think that employees and their unions would be very much on side.
Taking matters forward
I first took up the subject of this article with the States in October 2002 and received little response, although I know that one prominent local politician is now very much onside. However, here are vested interests, for example investment and professional fees alone could well be of the order of £15m. per annum. I am sincerely hoping our new government grasps the opportunity and will take a strong initiative to move matters forward.
Reshaping Guernsey
To conclude, moving to ‘pay as you go’ has many benefits. Payment of pensions is unaffected and substantial reserves can be released for capital infrastructure investment and investment in Guernsey generally, it releases strain on the annual budget and can help contain taxation.
The reserves released by changing to ‘pay as you go’ could help reshape Guernsey.
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