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

2  Improving clarity and transparency

9.  Public service staff do not have a good understanding of the value of their pensions, in part because employers and schemes do not provide them with clear and intelligible information.[32] This means employees are not able to make fully informed decisions when planning for their retirement and considering alternative employment options. It also limits the ability of public service employers to use pensions effectively to aid recruitment and retention.[33]

10.  The Deputy Director of the NHS scheme told us that four in ten members did not understand what size pension they were going to get and, as a consequence, some had to delay retiring by three years because their pension was smaller than they had expected.[34] In 2011, the NHS scheme will begin to issue annual benefit statements to its members and in the future it plans to include details of the capital value of the pensions built up.[35] These are welcome developments.

11.  For some years now, there has been a lack of clarity about the role public and private sector occupational pensions should play within the UK pension system.[36] The system has relied heavily in the past on good occupational and personal pensions to top up a state pension which provides a much lower share of retirement income than is typical across European Union and OECD countries.[37] However, this model has been undermined in recent decades by a significant decline in the extent and value of private sector occupational pensions.[38] Public service pensions have not declined by as much, and have appeared increasingly out of line with private sector pensions.[39] The Treasury told us that while there should be no "race to the bottom", it believed public service schemes should move more in the direction of private sector schemes.[40]

12.  Government support, in the form of tax relief and national insurance rebates, is used to encourage individuals to save for their retirement through occupational and personal schemes. This support amounts to around £35 billion a year, equivalent to more than 2% of GDP.[41] However, it is not clear how the benefits of this support are distributed, or whether the spending could be put to better use elsewhere. The Treasury told us that the cost of the national insurance rebate alone is forecast to be £6.8 billion in 2012-13, which would be enough to fund a £10 to £15 a week increase in the basic state pension for each recipient.[42]

13.  There is a further concern that the level of taxpayer spending on public service pensions could appear disproportionate to the amount spent on encouraging other savings for retirement through tax and other incentives.[43] The 2007-08 changes have transferred an increasing share of the future costs of public service pensions from taxpayers to employees. However, perceptions remain that an unwarranted level of taxpayer support is directed to public service pensions when compared with that available to private sector workers, who make up four-fifths of the total workforce.[44]

14.  The implementation of the 2007-08 changes to public service pensions did not sufficiently take into account impacts on other areas of public policy and spending. For instance, there was no assessment of the impact that higher employee contributions and lower public service pensions would have on the number of people opting out of their schemes.[45] Higher opt-out rates would in turn increase future demand for means-tested benefits. Moreover, the Treasury was not able to tell us whether wider public service reforms which would give rise to new types of delivery bodies, such as GP commissioning consortia and free schools, would affect employees' eligibility to belong to public service pension schemes in future.[46]

15.  More changes to public service pensions are expected over the next three years to implement decisions announced by the Government in 2010, and to respond to recommendations in the Hutton Commission's March 2011 final report on public service pensions.[47] There are costs associated with continually changing pension arrangements. These include increased administration costs and the potential impact on employees' confidence in the value of their pensions.[48] The Treasury accepts that it was a weakness of its approach to the 2007-08 changes that it did not set out clear and measurable objectives against which to monitor performance over time.[49] It is important that the Treasury clearly defines the objectives of any future changes and develops consensus around them, in order to promote a period of stability for public service pensions.

32   Qq 26-27, 86, 110; C&AG's Report, HC 662, para 3.13 Back

33   Q 36 Back

34   Q 86 Back

35   Q 86 Back

36   C&AG's Report, HC 662, para 3.7 Back

37   Q 1 Back

38   Qq 2, 94-95, 122; C&AG's Report, HC 662, para. 1.9 Back

39   Qq94-95 Back

40   Q 86 Back

41   Qq 41, 48 Back

42   Qq 43-46, 54-57; Ev 21  Back

43   Qq 5, 40 Back

44   Qq 5, 15-17, 65; C&AG's Report, HC 662, para 3.14 Back

45   Qq 143-151 Back

46   Qq 111-114 Back

47   Qq 101-108; Independent Public Service Pensions Commission, Final Report, 10 March 2011; HM Treasury, Budget 2011, HC 836, Session 2010-11, 23 March 2011, para 2.12 Back

48   Qq 36, 101; C&AG's Report, HC 662, paras 6 and 12 Back

49   Qq 73; C&AG's Report, HC 662, para 8 Back

previous page contents next page

© Parliamentary copyright 2011
Prepared 26 May 2011