It's not really a case of whether it's reasonable, more of whether it's sensible or not. You obviously feel not because of the impact on service but either they don't agree or haven't realised.
They took advice, and decided what action they were going to take based on that advice. Taking advice from an external consultant doesn't oblige them to follow that advice.
They took a view that either they didn't need to pay staff market rate in order to keep them, or that they were not overly-concerned about the prospect of staff leaving, and therefore didn't propose/couldn't afford to suddenly increase everyone's salaries dramatically.
Retention and recruitment are not the same thing, and if they've been advised the market rate for a job is £x, and (as you say) it will be difficult to fill the post, clearly it is sensible for them to offer market rate in order to get someone.
It's not a case of increasing the pay to what it "should have been". Any organisation takes a number of factors into account in setting pay, and where they want to/need to place themselves in terms of market rates is one of those. The only "should" with pay (other than with widespread collective agreements) are that pay must be at or above the appropriate minimum wage rate and must not be discriminatory. Other than that, it's down to the individual organisation to pay what it thinks it needs to/is appropriate and also to individual employees to decide what pay they are prepared to accept for a given role.