Public sector pension reform has been a cornerstone of the coalition Government’s deficit reduction programme since entering office in 2010.  David Cameron stated that public sector pensions were overly generous and thus an unfair burden on the taxpayer and, after putting Lord Hutton to task on the issue, resolved to address the public/ private sector pension imbalance.

The reforms faced strong and widespread resistance amongst unions in both their original and then watered-down forms.  The Government gave way to union pressure, with the IoD describing the more moderate reforms as “unaffordable” and “insulated from economic reality”.  Protracted negotiations, disagreement and mutual hostility continued, and nationwide strikes made the issue a very high profile Coalition headache.  But at the end of December it seemed that a modest Government victory was in sight.  Danny Alexander announced that an agreement with the main unions had been reached in principle, and without the Government being forced to offer any more money than they had put on the table before the strikes.

However, after this apparent resolution, a new report from the Institute for Fiscal Studies (IFS) confirms the IoD’s suspicions that the final package of reforms will not have beneficial effects on either the state of public finances or the growing pay and pension gap between the public and private sectors.

The IFS states that although they improve the structure of the system, the recently negotiated reforms will “make little or no difference to the long-term costs” of public sector pensions.  This is because the savings offered by raising the retirement age are offset by other elements of the pension package, such as a more generous deal for low-paid public sector workers.  Furthermore, this improved offer for those at the bottom end of the public sector pay scale serves to widen the gap between public and private sector pension plans.

The final package does improve fairness, with the lower paid benefiting and the richer losing out. But the real savings come from the CPI indexing, which was announced in 2010 with little fanfare. Rather than reforming in stages, it would have been better to have enacted a single fair, sustainable package.