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State pension changes could 'clobber' public sector workers

By Vivienne Russell | 14 January 2013

Plans to introduce a single ‘flat rate’ state pension from April 2017 could leave thousands of public sector workers out of pocket, unions have warned.

State pension to be reformed
Photo: istock
Ministers will today publish a white paper setting out how they plan to merge the fixed basic state pension with the second state pension, which is based on earnings and amount of National Insurance contributions.

Read PF's updated story here

It is expected the new weekly rate for the combined pension will be £144. Currently, the basic state pension is £107.45, and pensioners can top up through either their entitlement to the state second pension or through means-tested Pension Credit.

However, most public sector workers contract out of the state second pension as their defined benefit pension schemes provide an equivalent benefit. It also means they pay less National Insurance, but this could change in order to guarantee eligibility for the full state pension.

Public sector union Unison said workers could be ‘clobbered’ with an NI increase of as much as 3.4%.

‘Who will be worse or better off following these changes will depend on salary growth, which remains stagnant for many workers, including millions in the public sector, and inflation, which continues to eat at the income of low earners,’ said assistant general secretary Karen Jennings.

‘What is clear is that the real winner is likely to be the Treasury, which will receive a National Insurance boost from pension scheme members and employers. This windfall must go back to employers otherwise there is a real risk that many will look to dumb down their current pension offerings even further.’

But Institute for Fiscal Studies director Paul Johnson said higher NI contributions from public sector workers would translate into better pensions in retirement.

‘At the moment, if you are on a public sector occupational scheme, you are effectively giving up your right to the state second pension. Under this new system, you would get the full flat-rate pension, plus you would continue to get your public sector occupational scheme,’ he told the BBC.

Johnson added that the big winners from the changes would be the self-employed who currently cannot access the state second pension.

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