Treasury grilled over public sector pension costs

The Commons Public Accounts Committee has questioned the validity of Treasury cost projections for public sector scheme changes, saying it did not fully test the impact of its assumptions.

The committee today published a report, using evidence from the Treasury and the Department of Health (DoH), examining the cost of public service pensions and the impact of changes made to public sector pensions in 2007/08.

It said the Treasury did not test the impact of 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.

The committee also heard concerns that the discount rate used to set pension contribution levels was too high.

Committee of Public Accounts chairman Margaret Hodge MP said: "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."

In 2007/08, new pension schemes were introduced for civil servants, NHS staff and teachers 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 committee said additional changes made by the Coalition government last year, including indexing pensions to the Consumer Prices Index rather than the Retail Prices Index, are expected to reduce costs further.

It said 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.

Hodge added the Treasury needs to publish its timetable for implementing this mechanism or an alternative scheme, as well as the expected savings as soon as possible after the consultation.

"Employees currently 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," she said.