Treasury urged to act on public service pensions following '£17bn mistake'

A report from the House of Commons Public Accounts Committee (PAC) has warned that the '£17bn' public service pensions age discrimination "mistake" by HM Treasury (HMT) will take “generations to resolve”.

It stated that the discrimination identified by the McCloud ruling was only part of a “perfect storm” brewing around public service pension costs.

The report stated that HMT has “done little" to identify and manage the stark differences in average pensions between genders and other groups and that it should have foreseen the age discrimination issue that gave rise to the 2018 McCloud judgment.

It also emphasised that whilst HMT wants pension scheme members to pay the estimated £17bn to address this discrimination, the unlawful reform was “its own mistake - a mistake which could have been avoided by listening to advice and which will take many decades to resolve".

However, the committee warned that this was only a small part of the costs to the public purse if the government fails to address the increasing number of young people unable to afford to plan for a sufficient pension.

Indeed, the report stressed that HMT seems “unconcerned about the drop in enrolment by some workers”, warning that there is "a danger of a perfect storm" where some young people believe they cannot afford pension contributions due to the high costs of living and will retire with a reduced public sector pension as a result.

It also noted that many younger workers will likely continue to pay rent in retirement because they cannot afford to buy a home, warning that the cost of supporting this generation will fall on future taxpayers.

PAC chair, Meg Hillier, commented: “The Treasury’s £17bn mistake on pensions reform is a ripple compared to the tsunami of costs to the public purse if government fails to address the growing number of young people unable to afford to plan for a proper pension.

“It’s lack of curiosity about why nearly a quarter of a million workers are not joining these pension schemes is a concern. Pension planning must be long term; mistakes and poor planning have an impact for decades.

“Short-term cost savings can become long-term costs to individuals with lower retirement incomes and the taxpayer who may end up supporting them.”

Concerns as to who will fund changes made as a result of the McCloud judgment have been echoed by BMA pensions committee chair, Dr Vishal Sharma, who agreed that it is “completely unacceptable” for members of the pension scheme to be “left to foot the bill for these changes”.

“This was a problem entirely of the government’s making and it is their mistake to fix,” he added.

These were not the only concerns raised by the report however, as the PAC warned that HMT has had to revisit key elements of the reforms which may take “decades to resolve fully”, with concerns also being raised about the cost control mechanism not sufficiently protecting taxpayers and members.

It stated: “The Government Actuary’s Department says that the cost control mechanism is likely to be triggered every four years, rather than only as a result of ‘extraordinary, unpredictable events’ as HMT intended.

“This undermines the usefulness and stability of the mechanism and will impact employees and employers alike. HM Treasury was advised at the time of the reforms of both the age discrimination problem and that the cost control mechanism could easily be triggered.”

As such, it stated that HMT must prioritise work to quickly resolve the challenges presented by the McCloud judgment and cost control mechanism, in order to give certainty to scheme members and employers, requesting an update on this in six months time.

The inquiry also concluded that it was becoming "clear" that public service pension policy is affecting the delivery of frontline services, such as in relation to education and health, noting that a "substantial increase" in employers’ pension contributions in 2019/20 has already directly impacted on employer budgets.

In light of this, it recommended that HMT regularly set out the likely impact on employers’ budgets of employer contribution rate changes in advance of their implementation, in an effort to help minimise the impact on frontline services.

This message was again supported by BMA, as Sharma warned that the "complex and punitive NHS pension system" continues to be a key reason behind the medical staffing crisis."

“The government recently made changes to tackle similar recruitment and retention issues for judges, removing tax relief from employee contributions which means they are not subject to the additional taxation that has been so damaging to the medical workforce," he said.

“Therefore, ministers should introduce similar measures for doctors and their colleagues to ensure that they can remain working in the health service at such a pivotal time for the nation’s health.”

More broadly, the committee argued that HMT has not done enough to ensure people understand the value of their pensions, noting that in 2011, PAC had recommended that HMT should work with employers and pension schemes to ensure that clear and relevant information is provided to employees on the value of their pensions.

Despite this, it found that "limited progress" has been made on this front and that more still needs to be done to improve employees’ understanding, with complexities introduced by the McCloud judgment exacerbating this issue further.

Indeed, HMT data provided to the committee implied that over 238,000 employees have opted out of their pension, however, it did not provide clear understanding of why they do so and whether some groups are more likely to opt out.

In light of this, the committee suggested that HMT "lead from the centre" and seek to understand members’ views regarding their pensions, including the reasons why people may opt out of a scheme and whether this has a long-term impact on other parts of public services and expenditure.

"Stark differences” in average pensions between genders and other groups were also highlighted as a concern, with PAC asserting that HMT has done little to identify and manage these pension gaps.

The committee acknowledged that the different outcomes exist because of past differences in pay, stating that HMT seemed resigned to the pension gap enduring for many decades after the pay gap is closed.

“However, we are concerned that this will lead to inequalities persisting and could lead to legal challenges in the future,” it stated.

“We are also concerned that HMT does not specifically consider whether armed forces pension scheme arrangements are sufficient to support personnel when it becomes time for them to move into civilian life.”

Given this, it urged HMT to be proactive in collecting and analysing data to identify where significant gaps in average pensions exist between different groups, which could then inform a wider study on the adequacy of public service pensions.

The PAC also warned that HMT does not have the data needed nor had it evaluated the impact of its reforms, or whether they are achieving its pension policy objectives, with the PAC concluding that it is “not convinced it is on track”.

Indeed, the committee noted that whilst HMT's 2011-15 reforms committed to making no more reforms for 25 years, "just six years into that period" there are already substantial issues that need to be resolved.

“HMT has not yet performed an evaluation of its reforms as it is still in the process of implementing them,” it stated.

“We are concerned that HMT has still not prioritised an evaluation of its reforms, particularly given the importance of pensions to individual scheme members, their impact on frontline services, and their significant cost to the taxpayer.”

It, therefore, recommended that HMT perform an interim evaluation of its 2011–2015 reforms to ensure it is on track to meet each of its objectives, taking account of whether pensions are working for employers, employees and other taxpayers.

Commenting in response to the concerns, an HMT spokesperson said: “We welcome the report by the committee and will study its findings carefully.

“Public sector pensions are among some of the very best on offer and the vast majority of public sector workers elect to enrol in these schemes.

“We will provide a formal and comprehensive response directly to Parliament by means of a Treasury Minute in due course.”

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