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Cost savings only part of public sector pension reform picture, expert says

Whole scale reform of public sector pensions in the UK must take into account more factors than mere cost savings, a pensions law expert has said.

John Hanratty of Pinsent Masons, the law firm behind Out-Law.com, said that linking the retirement age under public service pension schemes to the state pension age was one of a package of measures the Government is seeking to agree with trade unions.

The heads of agreement on the new arrangements announced by the Treasury before Christmas, which are due to come into force from 2015 "are designed to make the public service schemes fair, sustainable and affordable over the longer term," he said.

Hanratty was responding to claims by an independent pensions consultant, reported by the BBC's business editor Robert Peston, that the savings from making staff work longer before retiring would be offset by the faster build-up of benefits under the new public sector deal.

The consultant said that the cost to the taxpayer, before the reforms, of having a retirement age of 60 was 31% of the average public sector salary. After the reforms, when the retirement age rises to 67, the cost to the taxpayer will be broadly the same: 31% of a teacher's salary, 32% of an NHS worker's salary and 26% of a civil servant's salary.

"The total cost of the more generous, but later pension, is virtually the same as the cost of the current, less generous but earlier pension," he told Peston.

He said this was because of the more generous accrual rates, or rate at which a pension builds up each year before retirement, under the new schemes.

The calculations were based on what a typical 40 year-old public sector worker would expect to receive in pensions in retirement under the older system and under the new system.

A Treasury spokesperson said that the consultant's "partial" analysis was inaccurate, as it did not take into account the other factors considered in the overall cost ceilings agreed with the unions.

"The Government has been clear that reform to public service pensions will save the taxpayer tens of billions of pounds over the next few decades and significantly improve the long-term fiscal sustainability of this country. We do not recognise the analysis which is being reported; it is partial, based on stylised assumptions rather than an overall workforce model and only includes one of three strands of public service pensions reform which will deliver savings," the spokesperson said.

The age at public sector employees can retire will rise in line with the state pension age from 2015. The various public sector schemes under consideration will be calculated on a career average basis rather than on a final salary basis, meaning that the amount of a scheme member's pension will be based on average pay rather than earnings on retirement.

Increased pension contributions, amounting to an average of 3.2% of scheme members' salaries, will be phased in for existing public sector pension scheme members over three years from 2012. However, the Government has said that the second and third years of these increases will be reviewed if schemes experience high drop-out rates from staff who cannot afford to pay more.

The Treasury said that the third strand of its pensions reform was the change in the measure of inflation used to calculate increased contribution rates from the Retail Prices Index (RPI) measure to the lower Consumer Prices Index (CPI) in April 2011.

"As many private sector organisations have found when reviewing their own schemes over recent years, cost is an element - but not necessarily the only element. The reformed schemes have to be sustainable, which requires them to be attractive to encourage new membership, and fair to both funders and members as well as affordable," pensions expert Hanratty said.

"As the Treasury has pointed out in its response to the comments, the analysis on which those comments are based focuses on only one strand of the proposed reforms and is, in the Treasury's opinion, 'partial' in its construction," he said.

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