Richard Johnstone | 26 May 2011
Changes to public sector pensions introduced by the previous government will lead to substantial savings, the Public Accounts Committee said today.
However, with a fresh round of reforms due following the Hutton Review, the PAC urges the government to state what it believes to be a sustainable level of spending on public service pensions.
The 2007/08 changes are projected to save £67bn over 50 years, stabilising costs at 2% of public expenditure. The PAC’s report said this saving represented ‘a significant achievement’.
The 2007/08 changes included: increasing the age at which a full pension could be drawn from 60 to 65 years; increasing the level of contributions from staff; and introducing a mechanism to transfer from employers to employees the extra costs of pensioners living longer than expected.
According to PAC chair Margaret Hodge, the Treasury expects the majority of savings to come from this cost sharing and capping mechanism. However, it has not yet been implemented as the government is consulting on the recommendations of the Hutton Commission.
Former Labour Cabinet minister Lord Hutton carried out the review of public service pensions for Chancellor George Osborne, and reported in March.
He concluded that final salary schemes should be replaced with those based on career-average earnings. The report also said that cost sharing and capping should be developed into a ‘cost ceiling’ that sets an upper limit on the amount the government contributes to employee pensions.
The government accepted the Hutton recommendations and is now consulting on them before setting out its proposals for further change in the autumn.
The PAC said that, following Hutton’s report, the government should develop a clear strategic direction for public service pensions.
Specifically, it needs to take an early decision on whether to implement cost sharing and capping, to provide certainty to both employees and employers.
Hodge said: ‘Employees currently lack the information they need to understand the value of their pensions and make rational decisions accordingly. The Treasury must work with employers and pension schemes to improve the quality of information provided to employees.
‘We are also concerned that the Treasury has not set out clearly what level of spending it considers sustainable in the long term. Instead, officials appeared to define affordability on the basis of public perception.’
Unions said that the PAC report ‘shattered’ the case for the changes proposed by the Hutton report, and showed they were ‘driven by political ideology and not economic necessity’.
Mary Bousted, general secretary of the Association of Teachers and Lecturers, said: ‘The PAC report clearly shows that the cost of public sector pensions is not spiralling out of control, as the government claimed. The truth is that the costs are stabilising following changes made in 2007.
‘The government has failed to produce any evidence to show whether savings of £67bn are adequate because it has not calculated what the country can afford. This failure shows only too clearly that the government has been negotiating in a vacuum. It keeps telling us that pensions are too expensive but won’t tell us what it can afford.’
Christine Blower, general secretary of the National Union of Teachers, added: ‘The PAC is right to criticise the government for proposing further changes without even having considered what is affordable. This is a policy based on nothing short of false assumption and spin.’
