The cost to the government from public sector pensions could hike £4bn per year after it lost its appeal in the courts.
In a judgement handed down in December, the Court of Appeal ruled the government had discriminated against a group of judges and firefighters on the grounds of age, race and equal pay in relation to changes to their pension.
Before April 1 2015 the judges – with the firefighters in a similar situation - were all members of the Judicial Pension Scheme (JPS), a defined benefit scheme established after the Judicial Pensions and Retirement Act 1993.
This was closed on 31 March 2015 and serving judges were transferred into a replacement scheme, the New Judicial Pension Scheme (NJPS).
Transitional provisions were put in place, which allow older judges to remain members of the JPS, either until retirement or until the end of a period of tapered protection, dependent on their age.
But the latest ruling concluded the transitional protections were discriminatory towards those who could not stay.
The government is now seeking permission to appeal this decision, said Elizabeth Truss, chief secretary to the Treasury, in a written statement published yesterday (January 30).
"If this is unsuccessful, the court will require steps to be taken to compensate employees who were transferred to the new schemes," she noted.
Tom Selby, senior analyst at AJ Bell, said members of public sector schemes could receive a "massive boost" to their retirement pots if the government’s appeal fails.
He said: "This boost will come at a cost to the Treasury – and taxpayers in general – of somewhere in the region of £4bn a year.
"The implications for the public finances are potentially gargantuan. It is highly unlikely such a hit to could simply be absorbed by the Exchequer, so cuts in spending or increases in taxes will almost certainly be needed to fill this pensions black hole."
Another consequence of this court ruling is that the government is halting the valuation of public pensions.
With the 2015 reforms, the government was to offer taxpayers and employees protection from unexpected changes in pension costs in the form of a cap.
The level of the cap is set as a percentage of pensionable payroll, which varies from scheme to scheme.
In September, the government announced there could be cost cap floor breaches in at least some of the schemes, which would imply an increase in benefits for the members of those pension funds.
But Ms Truss said given the "potentially significant but uncertain impact" of the court judgment, "it is not now possible to assess the value of the current public service pension arrangements with any certainty.
"It is therefore prudent to pause this part of the valuations until there is certainty about the value of pensions to employees from April 2015 onwards," she added.
Prospect and Trades Union Congress (TUC) have already criticised the government on this decision, with the former arguing that "ministers must not duck out of their responsibilities on public sector pensions".