Public sector pensions on the brink of madness

If the current conundrum with discrimination issues in the public sector pension schemes were a work of fiction, no one would believe it.

The transitional measures put in place in 2011 – which meant that older members could remain in the old schemes with better benefits – were introduced against Lord Hutton’s recommendations report, which several months earlier highlighted the dangers of special protections interfering with age discrimination legislation.

Despite the warnings, the government introduced these measures in an attempt to convince trade unions to accept the public sector reforms, as they were threatening national strikes.

Taxpayers saving into AE schemes with minimum pension contributions of 8 per cent will not be happy with footing the bill for civil servants to have even better benefits

Fast forward some years, and the first discrimination cases hit the courts. And which organisation was one of the major driving forces behind one of the claims? A union.

Whatever the angle from which you look at it, this case brings public pensions to the brink of madness and is a complicated mess, as our feature last month shows.

To be fair to the Fire Brigades Union, which supported firefighters in their successful claims, they were not happy with the government proposals back in 2011.

The trade union described the proposals for the Firefighters’ Pension Scheme as “unacceptable” on the grounds that they included “unaffordable and unfair contribution rates” and a “totally unrealistic retirement age for firefighters”.

But it should be questioned as to whether a longer-term perspective was needed in face of the potential overwhelming consequences of the case.

Because, as everybody knows, nothing is ever simple in pensions.

Due to individual discussions held with unions during the reform process, each public sector scheme has its own benefit structure. There is no one size fits all.

This means applying a remedy across the board to solve the discrimination problem – which the government has committed to – seems to be a Herculean task.

There is also a significant risk that public pensions costs will go up with whatever solution is implemented.

If the reforms introduced in 2015 were left untouched, spending on unfunded public service pensions would fall gradually from around 2 per cent of GDP to below 1.5 per cent of GDP over the next 50 years, according to the Whole of Government Accounts 2017-18.

One of the main goals of setting up the Independent Public Service Pensions Commission, back in 2010, was to look at “the long-term affordability of public sector pensions”. This objective might have gone out of the window by now.

It could be argued that taxpayers, who are mostly saving into auto-enrolment schemes with minimum pension contributions of 8 per cent, will not be happy with footing the bill for civil servants to have even better benefits. One wonders how much money the government will spend on advisers and consultants, and if the benefit uplifts members will receive in the end will justify such expense.

Finally, we should think about the impact for future generations of civil servants. At the time of the negotiation with unions, the government made a commitment that the scheme reforms would be sustained for at least 25 years.

If the costs of public pensions increase significantly with the discrimination remedies, who can guarantee that further – and more abrupt – reforms will not be introduced?

I am in favour of giving people what they are owed – and there is no doubt that discrimination did occur with the reforms – but how many of us will have to pay for it?

The question remains unanswered and will be haunting us for some years, I predict. 

Maria Espadinha is deputy editor of Pensions Expert