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Treasury’s ‘£17bn mistake’ that will take “generations to resolve” only part of “perfect storm” brewing in public pension costs

11 June 2021

In its report published today the Public Accounts Committee says HM Treasury has “done little to identify and manage the stark differences in average pensions between genders and other groups” and “should have foreseen the age discrimination issue that gave rise to the 2018 McCloud judgment”.

In 2011 and 2015 the Treasury introduced reforms aimed at making public service pensions more sustainable and affordable, but a 2018 Court of Appeal judgement (the McCloud judgement) ruled parts of the reforms unlawful. The Treasury now wants pension scheme members to pay the estimated £17 billion cost to put that right, despite the unlawful reform having been “its own mistake - a mistake which could have been avoided by listening to advice and which will take many decades to resolve.”

Around 25% of pensioners and 16% 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 schemes are almost all unfunded, meaning retirees’ pension benefits are paid out of current workforce contributions.

The Committee saw “evidence of public service pensions issues affecting delivery of frontline services, and independent schools opting out of pension schemes because of increasing costs”. It says HM Treasury doesn’t have the data it needs nor evaluated the impact of its reforms, or whether they are achieving its pension policy objectives - the PAC is “not convinced it is on track”. 

The Treasury also seems “unconcerned about the drop in enrolment by some workers”. The Committee warns on the “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 a reduced public sector pension as a result. Many younger workers will continue to pay rent in retirement because they cannot afford to buy a home and the cost of supporting this generation will fall on future taxpayers”.

Meg Hillier MP, Chair of the Public Accounts Committee, said:

“The Treasury’s £17 billion 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.”

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Image: PA