Headlines: January 31st, 2012

Public pensions reforms, now in the final stage of negotiation, are unlikely to save the taxpayer any money. This is the main finding from an IFS study.

The pension reforms just negotiated will make little or no difference to the long-term costs of public service pensions. The savings from higher pension ages are, on average, offset by other elements of the pensions becoming more generous. In general lower earners in the public sector will actually get a more generous pension as a result of the recently announced reforms. That is, they will be able to retire at age 65 with a higher annual pension than they would receive under current arrangements. This results from the move from final salary to career average schemes and the particular changes to accrual and indexation rules.

Conversely higher earners are likely to lose out. The move from final salary to career average relatively penalises those who see big increases in their earnings over time. By increasing the generosity to lower earners – a group less likely to have a good employer pension in the private sector – the reforms increase the difference between the public and the private sectors.

However, the taxpayer has already started to benefit from the move from RPI to CPI indexation of public service pensions, introduced by the government in the October 2010 Spending Review. This will substantially reduce costs.

On pay, the IFS study found that at the end of the two-year public pay freeze and the two year of 1% pay increases, public pay will return to where it was relative to private sector pay in 2008. This is because private sector pay reacted quickly to the recession. Pay in the public sector did not.

The IFS findings have been challenged. TUC General Secretary Brendan Barber said: “The big increase in contributions immediately reduces the cost of public sector pensions by taking a big chunk out of most public servants’ pay. 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 Treasury dispute the finding that the proposed pension arrangements will not save any money.