Treasury blasted for botched public sector pensions reform

MPs say £17bn cost of McCloud judgment could be “just a ripple” compared to looming “tsunami”
Damage to date is "just a ripple," PAC chair Meg Hillier says. Photo: KNOW MALTA by Peter Grima/Flickr/CC BY-SA 2.0

By Jim Dunton

11 Jun 2021

Civil servants and other public sector workers could see their pensions impacted for decades because of the Treasury's short-term focus on affordability, a report by an influential committee of MPs has warned.

Parliament’s Public Accounts Committee said the Treasury should have foreseen the discrimination issue that gave rise to 2018’s McCloud judgment, which is set to cost public sector pension scheme members at least £17bn to fix.

It said the department had failed to heed warnings about the protections offered to some public sector scheme members that underpin the case. The PAC also warned the Treasury was setting itself up for future legal challenges by failing to address gender-related pensions inequalities at the same time as the pay gap.

Last month, civil service unions put the Treasury on notice to expect a High Court challenge to its proposed McCloud remedy if it expected pension-scheme members to shoulder the cost of its fix with through their contributions.

PAC chair Meg Hillier said that while the cost of the McCloud judgment would be significant and could take decades to unfold, the Treasury’s wider failings represented far bigger threats to public-sector pension schemes and the national finances.

“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,” she said.

“Its 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.”

The PAC report said the Treasury had 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-related discrimination that was highlighted in the McCloud judgment.

MPs said the discrimination issue and the cost-control mechanism for public-sector pensions introduced under the government’s 2015 reforms had “undermined trust” between public-sector employers, scheme members and the Treasury.

They added that the Treasury “seemed resigned” to the gender-related pensions gap continuing for “many decades after the pay gap is closed”.

“We are concerned that this will lead to inequalities persisting and could lead to legal challenges in the future,” they said.

“HM Treasury should be proactive in collecting and analysing data to identify where significant gaps in average pensions exist between different groups. This analysis should inform a wider study on the adequacy of public service pensions, and to understand the impact of differences in pay and working patterns.”

More generally, MPs expressed fears that the Treasury was not taking enough of a holistic approach to public-sector pensions that viewed them as a way to protect the public finances from future welfare-spending requirements. 

They said public-sector workers who believed they could not afford pension contributions because of high costs of living would retire with reduced pensions, and those who could not afford to buy a home and continued to rent into retirement would be even more financially exposed.

The PAC added that the Treasury’s “focus on affordability” for public-sector pensions meant it had “lost sight” of the potential for pensions to aid recruitment and retention for key services. 

MPs said the department should undertake a review into the takeup and retention of public pensions, particularly amongst young professionals, to help understand the issues employers face when trying to demonstrate the value of pensions.

It said the review should identify areas where communication is working well and recommend best practice for employers.

A Treasury spokesperson said the department welcomed the committee’s report and would consider 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,” they said.

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

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