State pension arrangements are being overhauled to give pensioners a predictable, single payment of £144 a week from April 2017.
But the change, announced by pensions minister Steve Webb in Parliament today, has sparked a debate about the likely impact on the 5.3 million public sector workers in defined benefit schemes. They are currently contracted out of the state second pension, which the new arrangement will replace.
A white paper, The single-tier pension: a simple foundation for saving, sets out how ministers plan to merge the fixed basic state pension with the second state pension, which is based on earnings and the amount of National Insurance contributions paid. Currently, the basic state pension is £107.45, and pensioners can top this 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 pension schemes provide an equivalent benefit. It also means they pay less National Insurance, but this will change under the new proposals.
The white paper states: ‘When the single-tier pension is introduced and contracting out ends, all employees who were members of a contracted-out scheme immediately before introduction will cease to receive the “contracted-out rebate” and will start to pay full National Insurance contributions. This will mean an increase in the rate of contributions that they pay equivalent to 1.4% of their earnings, bringing them in line with other employees.’
The paper also confirms that public sector employers will not be able to offset the cost of the higher National Insurance contributions they must make through higher employee contribution rates or otherwise reducing the value of their scheme’s benefits.
But public sector unions warned that the changes could leave public sector workers out a pocket at a time of pay freezes.
Unison said workers could be ‘clobbered’. Speaking ahead of the announcement, assistant general secretary Karen Jennings said: ‘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.’
Christine Blower, general secretary of the National Union of Teachers, said: ‘An increase in NICs will cut take-home pay yet again and cause teachers to either opt out of their pension scheme or seek to leave teaching altogether. Teachers urgently need a pay rise to counter the rising cost of living, higher pension contributions and the threat of higher NICs.’
But the Institute for Fiscal Studies said members of defined benefit schemes, most of whom are public sector workers, were among the potential winners from the changes.
‘The proposed reforms would end contracting out and thus increase the state pension rights that this group will accrue,’ the IFS said.
Webb told MPs that higher National Insurance contributions would be more than set off by higher pension payments in retirement.
In order to qualify for the new single-tier state pension, an individual would need to accrue 35 years of NI contributions, up from 30 years currently.
Ministers said it would particularly benefit women, low earners and self-employed people, who find it difficult to earn a full state pension under current rules.