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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