No long-term savings from pension reform, says IFS
By Richard Johnstone | 31 January 2012
The major elements of the government’s controversial reforms to public sector pensions will not save any money over the long term, the Institute for Fiscal Studies has said.
In an analysis published today the
economic think-tank said the planned changes would make ‘little difference’.
Chief Secretary to the Treasury Danny
Alexander made a final offer on pensons to unions late last year.
This would increase the retirement age of schemes to match the state pension
age and move to a career-average defined benefit.
However, the IFS has found that the cost
of lower earners receiving more generous pensions through the career average scheme
will likely offset any savings the government achieves from raising the pension
The report concludes that another element of the reforms, moving
the inflation link for pension payments from the Retail Prices Index to the
lower Consumer Prices Index, ‘substantially reduces’ costs. Unions lost a legal challenge to this change
last December, but are currently appealing the ruling.
By increasing the generosity to lower earners, the IFS say that
the reforms are also likely to increase the difference between the public and
the private sector pensions, where lower earners are less likely to have good
IFS deputy director Carl Emmerson, the co-author of the paper,
found that ‘at least on average, this reform does not significantly change the
generosity of these schemes in the long run’.
He added: ‘The reforms to public service pensions implemented by the last Labour government, and this government’s
decision to switch from RPI to CPI indexation of pension benefits, will in the
long run reduce the generosity and therefore the cost of these schemes to the
‘But the consequence of the long-drawn-out negotiations over the
latest reform appears to be little or no long-term saving to the taxpayer or
reduction in generosity, on average, of pensions for public service workers.’
However, a Treasury spokeswoman insisted that the reforms would ‘save the taxpayer tens of billions of pounds over the next few decades’.
Calling the existing arrangements ‘untenable’, she added: ‘These savings are achieved by a number of changes, including asking people to work longer, pay higher contributions and changing the way pensions keep pace with inflation in retirement.
'These have to be seen as a whole package and were negotiated as such. This analysis only looks at one of these elements and as such is partial and misleading.’
Trades Union Congress
general secretary Brendan Barber also noted that the IFS had only addressed one of the three
parts of the changes. As well as the move to a lower inflation indexation,
public sector workers’ pension contributions are set to increase from April.
He said: ‘As its analysis concedes, the switch to CPI indexation has had a huge
impact on future pensions. Similarly the big increase in contributions
immediately reduces the cost of public sector pensions by taking a big chunk
out of most public servants’ pay.
‘The IFS draws its conclusions only from changes in scheme design, where union
negotiators – aided by the great support for the TUC's day of action on November 30
– were able to win concessions. But if you take the package as a whole there
can be no doubt that many public sector workers may have to pay more, work
longer and get a pension that will not keep up with the proper measure of the
cost of living.’
The IFS analysis comes the
day after two education trade unions announced that they have formally backed
the government’s offer.
Association of School and College Leaders and the Association of Teachers and Lecturers have announced
that they have accepted the headline deals.
National Association of Head Teachers has called for clarification on the
proposed increase in contribution rates before deciding on the offer.