The impact of the 2007-08 changes to public sector pensions - Public Accounts Committee Contents

Conclusions and recommendations

1.  Government projections show that the expected cost of public service pensions has reduced substantially because of changes made in 2007 and 2008. The Treasury expects the cost of pension payments to retired civil servants, NHS staff and teachers to stabilise over the next 50 years at around 1% of GDP, as a result of the 2007-08 changes. This would be a significant achievement. The exact range of savings is unclear because sensitivity analyses were not conducted on significant areas of uncertainty such as the size of the public service workforce. The Treasury acknowledged the need for more robust analysis in future, and we welcome its commitment to carry out deeper sensitivity analysis when considering further pension changes.

2.  Uncertainty about the discount rate used to set pension contribution levels has in the past undermined confidence about how future costs of pensions are valued. The discount rate is used to determine the annual levels of employer and employee contributions to pension schemes. A lower discount rate leads to higher contributions from employees and employers, reducing the long-term cost of pension schemes to taxpayers. The Treasury told us that the existing discount rate was too high and, following a public consultation, the Government set a lower rate. At the same time the Government committed to reviewing the discount rate every five years. In order to maintain certainty for both employees and employers in the future, we expect these reviews to be conducted promptly and transparently.

3.  Cost sharing and capping is the change intended to deliver 60% of the projected cost savings over the next 50 years, but it is not yet clear when it will be implemented or in what form. The delay so far in implementing cost sharing and capping is largely due to the time taken to revise the discount rate. Additional uncertainty has arisen from the Hutton Commission's recommendation to replace cost sharing and capping with a cost ceiling that fixes an upper limit on the amount the Government contributes to employees' pensions. The Government will consult on the Hutton recommendations before setting out its proposals for further change in autumn 2011. As soon as possible following the consultation, the Treasury should publish its timetable for implementing cost sharing and capping or an alternative scheme, as well as the expected cost savings.

4.  There is no measure defining an affordable level of expenditure on public service pensions, against which actual costs can be compared. The Treasury reports on public service pension costs as a proportion of GDP, but has no criteria by which to judge their affordability. The Treasury should set out what it believes is an affordable level of spending so it can assess the cost of public service pensions against a clear benchmark.

5.  Employees are not given the information they need to understand the value of their pensions. This hinders their ability to make rational decisions about important matters such as alternative employment options or whether to stay in, or opt out of, a pension scheme. Public service employers should make clear to prospective and existing employees the financial value a pension adds to their salary package. The Treasury should work with employers and pension schemes to ensure clear and relevant information is provided to employees on the value of their pensions, and that this information is regularly updated and its usefulness to staff assessed.

6.  It is not clear whether wider measures to encourage pension saving through occupational schemes are effective. The UK's pension model has traditionally relied on strong occupational pensions to supplement the state pension. However, the progressive decline in the number and value of occupational pension schemes, particularly in the private sector, means that many people are not saving enough for their retirement. The Treasury encourages pension saving through occupational and other schemes by spending substantial sums of money on tax relief and reductions in national insurance contributions, but has not explained whether these measures are cost-effective and well-targeted. The Treasury should clearly set out the costs and benefits of each measure of pension support, who benefits from each form of support, and how it judges the success of each measure.

7.  Changes to public service pensions affect other areas of public spending, such as means-tested benefits, but not all of these impacts have been identified and assessed. For example, increasing the amount that employees have to contribute to pension schemes could result in more people opting out of their pensions and having to rely on means-tested benefits, leading to extra costs to the public purse. Important implications of this kind need to be evaluated and understood. In particular, the Treasury should ensure that decisions to change public service pensions take into account the potential impact on spending on means-tested benefits.

8.  Further reforms expected in the near future present the opportunity for the Government to determine a stable, long-term direction for public service pensions. The Treasury announced in the 2011 Budget that it will propose further changes to public service pensions once it has consulted public sector workers, unions and others on the Hutton Commission's recommendations. The Treasury should set out clear objectives for any further changes, develop consensus around those changes and put in place arrangements to monitor progress. It should then aim for a period of stability so that employees' confidence in the value of their pensions is not undermined by fears that further changes will be made.

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Prepared 26 May 2011