Chief Secretary to the Treasury Danny Alexander has presented the unions with what he says is the government’s final offer on proposed reforms to public sector pensions.

As things stand now, most trade unions have agreed to so-called “heads of agreement”. The PCS civil service union and the teachers’ union NUT say they won’t accept it.

It’s not a done deal and negotiations over the finer points will continue. As ever with pensions, the devil’s in the detail, and each of the pension schemes will end up with a different scheme.

What are the latest changes?

The government has already given ground on some of the plans it laid out following a report by former Labour minister Lord Hutton in May. There was one major concession today: more generous accrual rates for people in the major public sector pension schemes.

Accrual rate is the fraction of salary for each year of service used to calculate your final pension. So if you work for 40 years and have a pension with an accrual rate of 1/80th, your annual pension would be the equivalent of half your pensionable salary.

The higher the accrual rate, the more generous the pension, so it’s not surprising that these numbers have been right at the centre of the dispute between the unions and the government.

Danny Alexander’s initial offer was based on an accrual rate of 1/65th of salary. He then came back to the negotiating table with a better rate: 1/60th.

He’s been even more generous today, offering teachers 1/57th, NHS workers 1/54th and civil servants a very high rate of 1/44th.

There is, of course, a catch. Mr Alexander has made it clear he is not prepared to change the cost ceilings – the limits on what the taxpayer will be expected to stump up.

The only way he’s been able to balance the books is by offsetting the higher accrual rates by reducing the way the value of pensions changes over time.

Lord Hutton’s initial recommendation was that pensions would be revalued in line with average earnings growth, a marker generally higher than inflation.

Now pensions will track CPI inflation, in the case of the civil service, or CPI plus 1.5 or 1.6 per cent for NHS staff and teachers.

The logic of that is based entirely on assumptions about the future. Inflation is actually outstripping wage growth at the moment, thanks to the economic downturn. The Treasury is assuming that earnings will outpace CPI in the long run though, as they historically have, creating a saving for the taxpayer.

So who are the winners?

The closer you are to retiring, the more you stand to gain from the new offer.

That’s because an instant switch to higher accrual rates mean many people will pay less now to get the same benefit, while the effect of lower revaluation rates will be long-term.

So civil servants nearing the end of their career should be happiest with the deal, while young teachers and nurses stand to lose the most over the course of a long career.

What hasn’t changed?

People will still have to work longer, with the age of retirement eventually climbing to 68 in line with changes to the state pension age.

And crucially for the Treasury, the plan to phase in increased employee contributions of an average of 3.2 percentage points over three years, with exemptions for the lowest-paid, is intact.

On the other side, Mr Alexander’s promise that there will be no changes for people who are within 10 years of retirement still stands too.

Has the government ‘won’?

Public sector workers will still have to work longer to get the same benefit, and some will lose out significantly. The change from a pension based on final salary to career average earnings means “high-flyers” stand to lose most.

But the government’s got the 3.2 per cent average increase in employee contributions past the unions, something that should secure significant savings for the taxpayer.

On the other hand, in the words of pension reform expert Tom McPhail from Hargreaves Lansdowne: “The government has been willing to offer some fairly generous accrual rates for the future – 1/44th looks particularly good.

“I think the government’s given quite a lot of ground on this. They have been driven by this imperative to secure those contribution rate increases.”

David Davison from Spence & Partners called the deal “incredibly generous” and said the Treasury may have left too much to chance in terms of relying on high wage inflation to create future savings for the taxpayer.

He also expressed concern about the government’s promise not to revisit public sector pension reform for 25 years, saying: “That’s pretty worrying. Heaven only knows where we’ll be in three or five years, let alone 25, when we might be struggling to compete with the Chinese or the Indians.”

Saga’s Ros Altmann echoed that, saying: “Nobody can possibly suggest that pensions should be unchanged in 25 years’ time. Lord Hutton has already said that, just in the few months since he did his report, that some of his estimates are too low.”

She added: “The unions have an astonishingly generous deal on the table. If they walk away from it, they don’t understand what’s going on. And if people in the private sector understood the situation, it’s them who would be going on strike.”

By Patrick Worrall

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