United Kingdom

Public sector pensions: MPs warn of 'perfect storm'

A 'perfect storm' is brewing around public sector pensions, as nearly a quarter of a million workers have opted out of their pension schemes due to rising living costs, MPs have said.  

In a report published last week, the Commons public accounts committee said that the Treasury seemed to be 'unconcerned about the drop in enrolment by some workers', even though this may end up costing the taxpayer more in the long run.  

It also criticised the Treasury for a 'lack of curiosity' about other important issues, such as the impact of pensions on recruiting and retaining staff. 

And it said that the Government's public sector pension reform blunder aimed at cutting costs will take decades to resolve fully and was already affecting some public services. 

MPs have warned of  a 'concerning' drop in enrolment by younger public sector workers

MPs pointed to a 'concerning' drop in pension enrolment by younger public sector workers, such as nurses and teachers, saying that the Treasury had not done enough to ensure people understood the value of their pensions.  

'There is a danger of a perfect storm where some young people believe they cannot afford pension contributions because of high costs of living and retire with no equity and a reduced public sector pension as a result,' the report states.

'The cost of supporting this generation will fall on future taxpayers,' it added. 

It said that the Treasury did not have a 'clear understanding' as to why over 238,000 public sector employees had dropped out of the pension scheme and warned of the possible knock-on effect this could have on other parts of public spending, such as benefits. 

'There are understandable reasons why people may choose to opt out of pension schemes for example, owing to short-term spending priorities, but inadequate pensions are likely to cause issues in the future and push costs into other policy areas, such as if people are more likely to be reliant on the benefits system,' the report stated.

Around 25 per cent of pensioners and 16 per cent of the working-age population are members of one of the four largest public service pension schemes covering the armed forces, Civil Service, NHS and teachers, the committee said. 

In 2019–20 the four schemes made payments of £33.5billion to 2.8million pensioners, with almost £24billion of this coming from the taxpayer.

'Given the value of pensions paid out in 2019/20 [...] you would expect the Chancellor to take at least a passing interest in whether this huge outlay represents value for money,' said Tom Selby, senior analyst at AJ Bell.

Public service pension policy is also affecting the delivery of frontline services in some areas, such as education and health, MPs warned.

Retirees' pension benefits are paid out of current workforce contributions - and the committee has seen evidence of independent schools opting out of pension schemes because of increasing costs.

The report said there was evidence that pensions can have an impact on staff choices about their work, which in turns has an impact on public services - for example a large number of doctors have reduced their working hours due to changes to the NHS pension scheme

In 2019-20, a substantial increase in employers' pension contributions directly affected employer budgets. 

This rise in costs mean that around 200 independent schools are set to withdraw from the Teachers' Pension Scheme, the committee said.

'This may put further pressure on the remaining schools, who may not be unable to withdraw from the scheme despite others in the sector viewing it as increasingly unaffordable,' the report states, adding that at least one higher education institution had had to make redundancies in response to the increase in costs.

MPs said there was also evidence that pensions can have an impact on staff choices about their work, which in turns has an impact on public services.

'For example, the interaction between the NHS Pension Scheme rules and the tax system means a large number of doctors have reduced their working hours, opted out of the scheme, or retired early,' the report stated.   

A focus on affordability means the Treasury has lost sight of the potential for public service pensions to support employers in recruiting and retaining the staff they need to deliver public services, the committee said. 

The report also highlighted a 45 per cent gap in the average pension being paid to male and female pensioners.

It said different pensions outcomes between male and female pensioners exist because of past differences in pay, and the Treasury seemed resigned to the pension gap enduring for many decades after the pay gap is closed.  

But the committee said it is concerned that this will lead to inequalities persisting and could prompt legal challenges in the future.

PAC chairwoman Meg Hillier MP said that the Treasury’s £17billion mistake on pensions reform was '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 also said that the Treasury's botched reforms of public sector pension may take decades to resolve fully. 

In a 2015 shake-up of public sector pensions, the Government ended costly 'final salary' schemes and moved members into career average ones, and made other reforms to accrual rates and pension ages.

But many employers offered a 'transitional protection' deal to workers close to retirement, which the court found discriminated against their younger colleagues, and led indirectly to race and sex discrimination as well.

That resulted in the Government losing an age discrimination court fight – the McCloud case - which means taxpayers are now facing a £17billion to put that right. 

PAC chairwoman Meg Hillier MP said: 'The Treasury’s £17billion 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.' 

She added: '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.' 

A Treasury spokesperson said: '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 welcome the report by the committee and will respond in due course.'

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