In 2007-08, new pension schemes were introduced for civil servants, NHS staff and teachers, designed to make public service pensions affordable. The changes are likely to reduce costs to taxpayers of the pension schemes by £67 billion over 50 years, with costs stabilising at around 1% of Gross Domestic Product (GDP) or 2% of public expenditure. The Committee is concerned that the Treasury did not test the potential impact of changes in some of the key assumptions underpinning the long-term cost projections. In addition, the Treasury has not tested whether reducing the value of pensions would affect the public sector's ability to recruit and retain high quality staff. Three-fifths of the savings to the taxpayer were expected to come from the cost sharing and capping mechanism - a transfer, from employers to employees, of extra costs that arise if pensioners live longer than previously expected. Employees would potentially pay 70% more for their pensions over the next 50 years if life expectancy continues to increase more than expected. Implementation remains on hold while the Government decides how to respond to the Independent Public Service Pensions Commission (the Hutton Commission). Public service employees do not have a clear understanding of the value of their pensions because they are not provided with clear and intelligible information to enable them to make rational decisions. Further changes to public service pensions are expected as Hutton's recommendations are implemented, but this should bring a period of stability and certainty for long-term public service pensions policy.

Changes made in 2007-08 to the pension schemes of civil servants, NHS staff and teachers are on course to deliver significant savings and stabilise pension costs around their current levels as a proportion of GDP. Yet the value for money of the changes cannot be demonstrated, because the Treasury and employers did not agree the long term role of pensions in recruitment and retention of staff and the Treasury no longer has a financial objective against which to monitor the impact of the changes.And there is a risk that overall costs to taxpayers will be greater as a proportion of GDP, if growth in GDP is permanently less than expected. The 2007-08 changes affected schemes that account for nearly three-quarters of UK public service pay-as-you-go pension payments. There were immediate increases in employee contributions for NHS staff and teachers, following earlier increases for civil servants. The normal pension age was raised for new staff, from 60 years to 65 years in most cases. In addition, a new cost-sharing and capping measure was introduced to transfer, from employer to employees, the risk of extra costs from changes in factors such as pensioners living longer than previously expected. The NAO estimates that these changes will reduce costs to taxpayers in 2059-60 by 14 per cent compared to forecasts made without the changes. Aggregate savings over all years in the period to 2059-60 are equivalent to £67 billion in 2008-09 prices.

Pension reform is high on the policy agenda of many advanced and emerging market economies. In advanced economies the challenge is generally to contain future increases in public pension spending as the population ages. In emerging market economies, the challenges are often different. Where pension coverage is extensive, the issues are similar to those in advanced economies. Where pension coverage is low, the key challenge will be to expand coverage in a fiscally sustainable manner. This volume examines the outlook for public pension spending over the coming decades and the options for reform in 52 advanced and emerging market economies.

On cover and title page: House, committees of the whole House, general committees and select committees

The Efficiency and Reform Group (the Group) was established within the Cabinet Office in May 2010 to lead efforts to cut government spending by £6 billion in 2010-11. Its long term aim is to improve value for money across government by strengthening the central coordination of measures to improve efficiency. The imperative to make savings in the short term has involved the Group imposing new controls on departments, such as moratoria on certain expenditure. Sustained efficiency improvements, though, will need a much deeper change to both the culture and institutional structure of government. The Group also needs to clear up confusion over who is accountable for what in terms of improving value for money, especially in defining its responsibilities and those of the Treasury and individual departments. The Group's actions have resulted in efficiency savings of £3.75 billion across departments in 2010-11. It should continue to describe any future spending reductions accurately and explain any impact on services. The scale of the challenge to deliver efficiencies is huge: the Government intends that half of the £81 billion reduction in spending planned over the next three years should come from efficiencies rather than through cuts to services or delays to important projects. Many of the efficiencies must be achieved in areas where the Group currently has a limited influence, or by local bodies, where it has none. The Group should set out how it will operate to ensure that its approach can be replicated across the wider public sector.

This report examines existing approaches to formula funding across government, and the principles that should be carried forward to new arrangements. Government departments distributed £152 billion, one-fifth of all government spending, to local public bodies in 2011-12 based on the three grants considered: Primary Care Trust Allocations; Dedicated Schools Grant; and the Department for Communities and Local Government's Formula Grant. These distribute funding to local public bodies in a range of sectors, including health, education, local government, police and fire and rescue services. The formula funding systems are complex, difficult to understand, and have led to inequitable allocations. For Dedicated Schools Grant, based mainly on historical spending patterns, per pupil funding for schools with similar characteristics can vary by as much as 40%. Under Formula Grant, nearly 20% of authorities received allocations which are more than 10% different from calculated needs. The priorities accorded to different elements of the formulae are judgements which have a direct impact on the distribution of funds. In some cases the basis for the judgement is guided by authoritative, published independent advice. In other cases, the basis for judgement lacks transparency, and external advice lacks status and influence. Only 4% of respondents to DCLG's consultation supported the current version of the model used to calculate Formula Grant. Some of the data used by departments in calculating relative needs is inaccurate and out of date. Current reviews of formula funding provide opportunities to address the weaknesses identified in this report.

The Work Programme, designed to help long-term unemployed people into sustainable employment, started in June 2011, replacing virtually all welfare to work programmes run by the Department for Work and Pensions. Over the next five years, the Programme is expected to help up to 3.3 million people at a cost of £3-5 billion. 18 prime contractors, each with sub-contractors, are contracted to deliver the Programme across England, Scotland and Wales. The Department has done well to introduce the Work Programme in 12 months. Prime contractors receive the majority of their payments once a participant has stayed in a job for a set period of time, with the length of time varying according to claimant group. Although some financial risks have been transferred to the providers, the test of whether the Programme is achieving value for money will be whether more people are in work as a result of the Programme than would have been if it had not existed and that the wider social benefits which underpin the cost benefit analysis are delivered in practice. The Department should seek assurance on a range of issues: that sub contractors are treated fairly, not misled into accepting inappropriate contracts, and receive the number of cases and funding they were promised; that harder to help claimants are not parked and ignored; and ensuring proper value for money. The Department relies on contractors to set minimum standards of service but has no measurable indicators against which the quality of service can be judged