£17bn pensions blunder illustrates the cost of political incompetence

Among the tens and hundreds of billions of pounds the government has been spending to support the economy in the midst of the current crisis, you might have missed the odd £17 billion that it is planning to shell out to rectify a major cock-up. This particular cock-up relates to reforms to the pensions provided to public sector employees. It is genuinely shocking. There will be no comeback. No accountability. Just a £17 billion bill to rectify the incompetence of ministers and/or civil servants.

It all started so well. All the way back in June 2010 one of the first actions of the coalition government was to set up a review of public service pensions to be led by Lord Hutton of Furness, the former Labour cabinet minister. These schemes had become far more expensive than ever intended as life expectancy had risen and interest rates fallen. They had also diverged dramatically from what was available in the private sector. The same trends in life expectancy and interest rates had led most similar pension schemes to close their doors to new members. It was clearly not sensible to avoid reform any longer. Promising to pay generous final salary-related pensions from age 60 to millions of public sector workers into the indefinite future looked, and was, too expensive and unfair on taxpayers.

Following Lord Hutton’s recommendations, the government implemented three key reforms across the public sector. First, pension ages for most public sector workers were to rise in line with the state pension age. Second, increases in costs were to be shared with the workforce such that employee contributions would rise. Third, pension entitlements were to be calculated on the basis of average earnings rather than final earnings, alongside some other technical changes to the accrual and indexation of pensions.

Even after the reforms public sector workers were still left with far more generous pension provision than almost anything available in the private sector. In fact, the reforms increased the annual pensions of a very large number of lower paid workers as a result of the move from basing entitlement on final salary to career average earnings. Even so the changes were set to save the taxpayer hundreds of billions of pounds over the long run.

One can quibble over the details. One could argue that even after these reforms the system was expensive and too generous relative to anything available in the private sector. But overall this looked like good policymaking. Address a long-term issue around funding and equity. Bring the unions and workforce largely with you. Make the system more progressive.

So, what was the cock-up? Well, in an effort to mollify the unions, the government agreed that those within ten years of pension age should not be affected by the reforms. You can see the argument. Those close to retirement have a set of expectations and plans and limited time to adjust to a new set of rules. Unfortunately, these reforms affected judges, among the rest of the public sector, and judges tend to be quite conversant with the law. They, and the firefighters, took the government to court on the grounds of age discrimination. Younger workers were treated less favourably than older workers. They won. The government was refused leave to appeal, so clear was the legal case.

Last week the Treasury issued a set of proposals designed to ensure compliance with the law. Those proposals are expected to cost £17 billion as younger workers are given the option, for a period, to accrue benefits under the older, more generous, scheme. Given the way the rules work this will be a straight giveaway from taxpayers to the highest paid and most privileged public sector workers.