In 2007-08, new pension schemes were introduced for civil servants, NHS staff and teachers. The changes were in response to Treasury requirements for savings in taxpayer costs to make public service pensions affordable.
Three main changes were made. First, the age at which a scheme member could draw a full pension was increased from 60 to 65 years for new members. Second, employee contributions were increased by 0.4% of pay for teachers and by up to 2.5% of pay for NHS staff. Third, a new cost-sharing and capping mechanism was introduced to transfer, from employers to employees, extra costs that arise if pensioners live longer than previously expected.
The Coalition Government announced additional changes in 2010, including indexing pensions to the Consumer Prices Index rather than the Retail Prices Index, which are expected to reduce costs further.
The committee is concerned the Treasury did not test the potential impact of changes in some of the key assumptions underpinning the long-term cost projections.
These include assumptions about the rate of growth in GDP, the size of the public service workforce and the wider impact of the 2007-08 changes on increased payments in means-tested benefits and reduced receipts from taxation and national insurance. In addition, the Treasury has not tested whether reducing the value of pensions would affect the public sector's ability to recruit and retain high quality staff. The committee heard concerns that the discount rate used to set pension contribution levels was too high.
A lower discount rate leads to higher contributions from employees and employers, reducing the long-term cost of pension schemes to taxpayers. Following a Treasury review including a public consultation, the Government has now set a new, lower discount rate, which was announced in the 2011 Budget. This has removed uncertainty about the appropriate level of the discount rate. Three-fifths of the savings to the taxpayer were expected to come from the cost-sharing and capping mechanism.
Under this mechanism, employees would bear a greater share of costs, potentially paying 70% more for their pensions over the next 50 years if life expectancy continues to increase more than expected. However, implementation of the mechanism has been deferred, initially because of the Treasury's discount rate review. Implementation remains on hold while the Government decides how to respond to the Independent Public Service Pensions Commission (the Hutton Commission), which has recommended that cost sharing and capping be developed into a 'cost ceiling' that sets an upper limit on the amount the Government contributes to employees' pensions. An early decision to implement cost sharing and capping is important for providing certainty to both employees and employers.
Margaret Hodge, Labour chair of the Committee of Public Accounts, said: "Government projections of the future cost of public service pensions suggest that the changes made in 2007-2008 will stabilise costs at around 1% of GDP, thereby bringing substantial savings to the taxpayer. This would be a significant achievement.
"However, we are concerned that the Treasury has not tested the impact of the changes on some of the key assumptions underlying their cost projections. "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.
"The Treasury expects the majority of savings to come from cost sharing and capping, a reform designed to ensure that employees bear a greater share of future costs. However, implementation has been deferred because of the Treasury's discount rate review, and remains on hold while the Government consults on the recommendations put forward by the Hutton Commission.
"As soon as possible after the consultation, the Treasury needs to publish its timetable for implementing this mechanism or an alternative scheme, as well as the expected savings. "Employees 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.
"Pensions form a substantial share of the total salary package received by public service employees. We are concerned that employees do not have a clear understanding of the value of their pensions, because they are not provided with clear and intelligible information to enable them to make rational decisions. This may mean the benefits of public service employment are not fully appreciated by current and prospective employees, potentially diminishing the influence of pensions as a recruitment and retention tool.
"Public service pensions policy is not joined up with planning in other areas of public policy and spending. While this is not a new issue, we still found it concerning given the potential impact that pension changes could have on areas such as future demand for means-tested benefits. There is little evidence to judge whether wider pension policy measures are effective, including measures such as tax relief and other incentives to encourage people to save for their retirement."
Commenting on the report, Andrew Dearden, chairman of the BMA's Pensions Committee, said: "The NHS pension scheme is fair to both the tax-paying public and NHS employees, and financially sustainable in the long term. As the Public Accounts Committee points out, the radical overhaul it underwent in 2008 is bringing substantial savings to taxpayers, with costs set to continue to decrease well into the future.
Over the next five years, the NHS pension scheme will actually provide a surplus to the Treasury of over £10 billion. "The Public Accounts Committee is right to point out that the Government needs to carefully assess the potential consequences of further changes to public sector pensions. Another sharp increase in contributions for NHS staff, or an increase in the retirement age, is likely to destabilise the largest public sector pension scheme, increasing the burden on the state, and creating problems with retention of senior staff."
TUC general secretary Brendan Barber also welcomed the report. He said: "This confirms what unions have been saying all along - that the reforms from a few years ago put public service pensions on a sustainable footing for the long term.
"Yet despite this, the government is looking to hike contribution rates to make short term savings and overhaul the schemes at the same time. It's no wonder that public service workers are anxious about the future of their pensions.
"The Public Accounts Committee makes a number of important points, including asking for clearer information from the Treasury, calling for ministers to test whether reducing the value of pensions will make it harder to attract and keep good public service workers, and whether cuts to pensions will mean more people relying on means tested benefits in retirement."
