“This is a major setback for the government and leaves it facing an additional £4bn of costs on the public sector pension bill. The case hinged around changes to the judicial and firefighters pensions schemes, which saw employees moved to a scheme on less generous terms from 2015. At the time, the government agreed to transitional rules, meaning they didn’t immediately impact workers of all age groups and instead allowed some workers closer to retirement to continue to benefit from favourable terms from the pre-2015 scheme. That was designed to appease workers close to retirement and prevent them experiencing a change in their retirement benefits a few years before the end of their career. But the attempt to smooth-over the impact of the pension changes has now backfired on Whitehall policymakers.
“Unfunded public sector schemes such as this are paid for from tax revenues. Rather than setting money aside for the future like other pensions, the cost of paying retirement benefits is met on a rolling basis through taxpayer revenues. That means the additional cost of unwinding the transitional arrangements falls directly on the Treasury and will have to be met through higher taxes, lower spending or more borrowing.
“The government now faces a number of difficult questions. It will have to address the court ruling that deemed pension changes to have unfairly penalised younger employees. Of course that is a boost for workers, who stand to gain from a more generous pension. But it leaves a big hole in the government’s financial projections. Ultimately, it may yet seek to revisit the terms of these schemes and implement reforms without transitional benefits to avoid the age discrimination pitfall that has scuppered their plans in this case.”