No long-term savings from pension reform, says IFS

30 Jan 12
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.
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.
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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 age.

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 employer provision.

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 taxpayer.

‘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.

Both the Association of School and College Leaders and the Association of Teachers and Lecturers have announced that they have accepted the headline deals.

However, the National Association of Head Teachers has called for clarification on the proposed increase in contribution rates before deciding on the offer.

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