The fog of confusion surrounding the government’s proposed reforms to public sector pension schemes may be lifting a little at last with the intervention of the Institute of Fiscal Studies (IFS).
The respected think-tank has given its verdict on the reform package, which is still the subject of bitter argument with the unions. The teaching union ATL has said it will back the latest deal, while other unions are threatening further industrial action.
We’ve FactChecked various claims that have come up during months of fierce debate on the issue. What does the IFS say?
Will the latest reforms save the taxpayer money?
Probably not, says the IFS. And that’s what a number of other experts have told us too.
The latest deal proposes to cut the generosity of pensions by making people work longer and increasing employee contributions.
To sweeten the pill, ministers are proposing to increase the proportion of salary paid into the scheme every year (accrual rate) and increase the value of the pension each year by a rate that is, in most cases, above inflation.
But the IFS says the most recent concessions make it unlikely that there will be a net saving to the taxpayer: “Decisions over the rates of accrual and indexation mean that the latest reforms might not save money in the long term.”
That chimes with some of the findings pensions expert John Ralfe shared with FactCheck earlier this month.
So is the cost of pensions unsustainable?
No, according to the IFS – but that’s got nothing to do with the latest reform proposals.
It says the most important changes were the last Labour government’s move to increase the age of retirement from 60 to 65 for most workers and the coalition’s change in the way pensions are uprated from RPI inflation to the lower CPI rate.
Those changes did cut the generosity of pensions – and therefore the cost to the taxpayer – meaning the overall cost of pensions probably will fall in the long term, from around 2 per cent of national income now to less than 1.5 per cent by 2040.
All of this was predicted in a notorious graph produced by Lord Hutton when he estimated the likely future cost of public sector pensions to the nation.
Trade unionists seized on this as evidence that the latest tranche of reforms were unnecessary.
Lord Hutton later backtracked, telling FactCheck worsening economic conditions meant the predictions he made in 2010 were now less likely to be accurate.
The IFS think he’s being too pessimistic, because the government’s freeze on public sector pay and cuts to the workforce will cancel out the effect of falling GDP.
So that adds strength to the unions’ argument that there is no pressing economic need for more reform, over and above the change to CPI and the raising of the retirement age.
On the other hand, if the overall generosity of pensions isn’t significantly affected by the most recent proposed changes, why such bitter opposition from the unions?
Who has the most to lose?
Controversially, John Ralfe suggested to us that the opposition to the latest deal from one union (the British Medical Association) was mainly about protecting its highest-paid members.
High-flyers and late bloomers like hospital doctors would have the most to lose from the plan to calculate pension value by career average earnings rather than final salary, he said.
Looking across the whole of the public sector, the IFS adds some weight to that point of view. The researchers conclude: “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.”
Are wages really higher in the public sector?
One of the traditional justifications for more generous pension provision for state workers is the notion that public sector workers get paid less on average than people with the private sector.
It is notoriously difficult to compare like with like when analysing the two, but the IFS says it has stripped out factors like different average ages and skill levels in the two sectors, and has found that there is still a public sector pay premium of 8.3 per cent.
That’s similar to the 7.8 per cent figure the Office of National Statistics came up with when they attempted the same exercise.
Are public sector pensions still more generous?
The IFS has backed John Ralfe, Ros Altmann, and every other pensions expert FactCheck has ever spoken to in agreeing that pensions for public sector workers are still much more generous than anything a private sector employee could aspire to get.
The researchers say the latest deal is still more generous package than the average private defined benefit pension – and that kind of package is now almost impossible to find in the pensions marketplace.
By Patrick Worrall
