The Treasury, together with the Cabinet Office, should work with employers “to understand how public service pensions can help them recruit and retain the staff they need”, the National Audit Office has recommended, saying the government “could do more” in this regard, having focused primarily on affordability so far. 

 

The government’s reforms to public service pensions, changing the final salary structure to career average from 2015, have helped contain the rise in future costs to the taxpayer, but it “could do more to consider how pensions can help recruit and retain staff”, the NAO said in a report published on Friday.  

 

It made the recommendation despite finding that pension costs have increased significantly and that an expected reduction over time could be affected by the effects of the pandemic on the economy, as it is measured against GDP. 

 

 

The NAO said that the Treasury’s objectives for public service pensions “do not consider the role of pensions in supporting the recruitment and retention of staff across public services”. Some public employers told the NAO they find the pension arrangements inflexible for supporting their plans for staff recruitment and retention. 

 

“The only real choice for most employees in the public sector is to stay in their pension scheme or to opt out. There is some evidence to suggest that those in lower age and income groups are more likely to opt out as they view contributions as unaffordable,” the NAO noted.  

 

Employee representatives said this is problematic because these groups include individuals most likely to benefit from pensions and other scheme features such as life assurance, according to the NAO, and that younger employees would like more flexibility to receive higher pay in exchange for lower pension entitlements because of high housing costs and student loan repayments. 

 

Employee contributions rose by a third in real terms in the 10 years after 2009/10, while public sector pay decreased by 12% in real terms, while the taxpayer’s proportion of total pension funding - £25.4bn in 2019/20 - remained the same as 10 years earlier, at around 75% of the total costs. The balance of taxpayer funding has shifted from central payments by the Treasury to employer contributions by departments and organisations, “to ensure that employers bear the consequences of their employment decisions”, the NAO noted. 

 

Gareth Davies, head of the NAO, said: “Public service pensions have become more expensive over time as the number of people receiving them has increased, with more members entering retirement and living longer. HM Treasury's reforms will help to contain future increases in costs for taxpayers.” 

 

He added that “as well as managing the implementation of the changes made necessary by the McCloud judgment, HM Treasury should consider how to ensure that pensions remain attractive to public servants, particular younger staff and those on lower incomes”. 

 

The Treasury said that it has used other approaches to recruit and retain staff, such as pension tax measures to help avoid senior clinicians reducing their overtime hours and retiring early. The stand-off between doctors and the government over pensions tax eventually led to an offer for some flexibility in accrual by the Department of Health, but was effectively replaced by the Treasury increasing the threshold income for the annual allowance taper to take effect in the 2020 Budget. 

 

The Treasury told the NAO that there are limits to the flexibility that it can provide, because of the government’s commitment to making no major changes to public service pensions for 25 years and the need for an enhanced consultation process on some elements of the schemes, such as accrual rates and normal pension age.  

 

 

Payments from the four largest pay-as-you-go public service schemes – for the NHS, teachers, the civil service and the armed forces – have doubled in real terms over the past 20 years, to £33.5bn in 2019/20. 

 

The Treasury expects that pensions will become more affordable over time as a growing proportion of retiring scheme members draw on the career average schemes. Projections from 2018 indicate that costs are expected to fall over 45 years, from 2.0% of GDP in 2019/20 to around 1.5% of GDP from 2064/65, but the NAO points out that “the government’s affordability measure is sensitive to changes in projections of GDP, which are now less certain because of the economic impacts of the COVID-19 pandemic, EU exit and climate change”. 

 

Costs are also much higher than initially thought because the government’s protections for older workers in the transition to career average were ruled unlawful in the McCloud judgment. The government has to remedy this, offering a choice of final salary and career average benefits for the years 2015 to 2022. The cost of doing so is estimated to be about £17bn. 
 

The cost control mechanism was paused by the government in 2019. The Treasury said last summer that the pause would be lifted but has asked the Government Actuary to review it, being worried that this is not working as intended. The mechanism was recommended by the Hutton review that had also recommended the 2015 CARE reforms; it said that government should set a “fixed cost ceiling: the proportion of pensionable pay that they will contribute, on average, to employees’ pensions over the long-term. If this is exceeded then there should be a consultation process to bring costs back within the ceiling, with an automatic default change if agreement cannot be reached”.  

 

The government also agreed a cost floor with unions, and provisional results from the most recent valuations showed that public pensions would likely have increased under the mechanism had it not been paused in 2019, partly because of lower than expected longevity increases. Four public service unions have launched a legal challenge to this pause of the cost control mechanism. 

 

 

Almost a third of the increase in pension payments is due to a 69% rise in the number of pensioners between 1999-2000 and 2019-20. There were 2.8m people receiving pension benefits from public service schemes at the end of March 2020, and another 5.2m were either current or former employees. About a quarter of pensioners in the UK and 16% of the working-age population are members of a public service pension scheme. 

 

The average annual pension for members of these four schemes has also increased over the past 20 years, by 16% in real terms to around £10,000 in 2019-20, the NAO has said; men receive £14,100 on average annually, whereas women only receive £7,750. There are likely to be considerable differences across the population of public service employees, which include jobs ranging from porters to hospital consultants. 

 

The average of £10,000, when combined with a full state pension of just over £9,000 a year, could offer a medium or "moderate” lifestyle for a single person which includes one holiday in Europe a year and a three-year-old car, according to the retirement living standards measure by the Pensions and Lifetime Savings Association. 

 

 

 

The average pension from public sector schemes contrasts with what is expected to be the picture in the private sector in future decades. The Office for National Statistics said last year that 92% of public sector employees with a workplace pension had a DB pension in 2019, compared with only 11% in the private sector. In January, a report by the Resolution Foundation showed that despite the introduction of auto-enrolment, of those whose retirement depends mainly on DC wealth, a substantial proportion report no such wealth at all.