Government confirms "no new money available" as it sets out agreement on public sector pension reform

The finalised Heads of Agreement represent the Government's "final position" on the main elements of new scheme design, it said. It added that trade unions had agreed to take the terms to their executives for further discussion as "the best that can be achieved through negotiations".

Cost ceilings for the new arrangements remained unchanged from the Government's enhanced offer made to the pension schemes on 2 November 2011, and it confirmed that "no additional money has been made available".

Most unions had also agreed to suspend any further industrial action before the final details of the arrangements were proposed in the New Year, the Government said.

"While most workers will still have to work longer and pay more, most low and middle earners working a full career will receive pension benefits at least as good, if not better, than they get now. Work will now progress on the implementation of the scheme designs and the Government's intention is to legislate when parliamentary time allows," the Treasury said in a statement.

From 2015 the various pension 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. The age at which public sector employees can retire will also rise in line with the state pension age.

Increased pension contributions, amounting to an average of 3.2% of scheme members' salaries, will be phased in over three years from 2012. However, 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 agreement comes after months of negotiations between the Government and trade unions and a nationwide strike of public sector workers on 30 November 2011.

Individual pension schemes including the NHS Pension Scheme, the Principal Civil Service Pension Scheme, the Teachers' Pension Scheme and the Local Government Pension Scheme (LGPS) had made their own proposals within the Government's cost ceilings, it said, although further discussions were needed on member contributions proposed under the LGPS arrangement. However, in all schemes the 'accrual rate' at which pension benefits are built up has been improved.

The three unions which represent members of the LGPS - GMB, Unison and UNITE had issued a statement seeking clarification of a letter from Local Governemtn Secretary Eric Pickles but Mr Pickles withdrew the original letter and sent a clarification letter which was accepted by the unions..

Public sector pensions law expert John Hanratty of Pinsent Masons, the law firm behind Out-Law.com, pointed out that the LGPS proposal was "considerably different" from those made by the other pension schemes.

The scheme intends to introduce a career average arrangement in 2014 - a year earlier than the others - in exchange for no increase in employee contributions for the vast majority of its members.

Treasury Secretary Danny Alexander said that the agreement meant that public sector workers would "continue to receive the best quality pensions available" to UK workers.

"These agreements deliver the Government's key objectives in full, and do so with no new money since our November offer. These reforms 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. This is a fair deal for public service workers, an affordable deal for the taxpayer and a good deal for the country," he said.

Schemes have also committed to protect public servants who are within ten years of their expected pension age on 1 April 2012 from having to work longer than anticipated or face any reduction in their expected benefits.

The Public and Commercial Services Union (PCS), the main civil service union, said that it would be putting the Government's proposals to its national executive committee. However, it would not recommend the proposals as "they do not provide a basis for agreement", it said.

The union said that the Government had refused to negotiate on its three core issues of "forcing public servants to pay hundreds of pounds more each year in pensions contributions, work for up to eight years longer and receive much less in retirement".

Cabinet Office Minister Francis Maude said it was a "great disappointment" that PCS general secretary Mark Serwotka did not turn up for "a single one" of the Government's 14 formal meetings with unions. However, Serwotka said the union remained "committed to negotiating" with ministers, who he accused of "unacceptable bullying" by making public sector workers "pay the price for a recession they did not cause".

"To reach an agreement there needs to be compromise on both sides and there has been none by the government on the issues of substance to our members. PCS wants to reach an agreement, but we could not accept that the Government's proposals are an unalterable framework within which any discussions have to take place," the union said in a statement.

The Government also said that it would retain its Fair Deal policy, which provides that staff whose roles are outsourced to the private sector receive a "broadly comparable" pension scheme to their public sector colleagues. A formal response to a consultation on proposals to reform the policy would follow in the New Year, it said.

Public sector pensions law expert John Hanratty said that one of the complaints about the current Fair Deal protections was that it was not compatible with the Government's so-called 'Big Society' approach applied to smaller and medium-sized employers, charities, not-for-profit organisations and mutual organisations.

"Most of the 'Big Society' type organisations could not afford to provide defined benefit pension schemes. In fact, recent research has shown that only around a quarter of such schemes are still in operation across the whole of the private sector," he said.

"I think we have to watch the continued negotiations with interest and, as I have said before, much will depend on communication between the parties."