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MPs concerned about pension reform

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The Treasury’s approach to reform of public sector pensions has been criticised by the influential group of MPs.

A report from the public accounts committee expressed concerns about assumptions used by officials as well as a lack of information about the impact of planned changes to pension schemes for government workers.

The report also expressed concern that the implementation of the changes - introduced in 2007-08 and billed to save £67bn over 50 years - had been placed on hold following a new round of reforms instigated by the new government in the form of Lord Hutton’s pension commission.

Select committee chair Margaret Hodge (Lab) said: “Government projections of the future cost of public service pensions suggest that the changes made in 2007-2008 will stabilise costs at around 1% of GDP, thereby bringing substantial savings to the taxpayer. This would be a significant achievement.

“However, we are concerned that the Treasury has not tested the impact of the changes on some of the key assumptions underlying their cost projections.”

In particular, the report highlighted changes to the size of the public service workforce, the rate of growth, tax and national insurance receipts. There were also concerns that the Treasury may not have considered the impact of the changes on the sector’s ability to recruit and retain staff or any knock-on impact on take-up of means tested benefits.

Ms Hodge said: “We are also concerned that the Treasury has not properly assessed how changes to public service pensions might lead to additional spending elsewhere, for example by increasing demand for means-tested benefits. Public service pensions policy must not be determined in isolation from other areas of public policy and spending.”

The committee expressed concern about the Treasury’s failure to identify a target cost for pensions. “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”, Ms Hodge said.

The committee’s concerns echo complaints about the Treasury’s approach to the more recent round of reforms including doubts over Treasury assumptions about the impact of contribution increases and delays in publishing a cost-envelope for the future scheme.

Ms Hodge added: “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.

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

The report focused on reforms to the civil service, NHS and teachers schemes. As with the 2007-2008 reforms to the Local Government Pensions Scheme, those changes included increased retirement ages, employee contribution rates and the introduction of cost sharing arrangements which aim to share rising costs between employers and employees.

A Treasury spokeswoman said: “We welcome the PAC’s report into the impact of changes made in 2007-08 on public service pensions and will respond formally in due course”.

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