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Pensions overhaul could hit public sector workers hardest

This article is more than 11 years old
Seven million workers would have to increase their national insurance contributions by 1.4% of their income
Pensions reform outlined by minister. ITN

A radical overhaul of the state pension designed to help low earners and women has been unveiled – but the cost would be higher payments by nearly 7 million employees, and by schools, hospitals and other public sector employers.

Pensions minister Steve Webb published a white paper to replace a complex mixture of pensions and top-ups with a single flat-rate pension, worth an estimated £144 a week.

For at least two decades after the changes are introduced, in or after April 2017, the majority of pensioners would be able to claim a higher state income than under the current system, with fewer than 10% of top earners losing out because they would not qualify for a bigger pension despite their higher contributions, said the government.

Despite the increase for many pensioners, the projected rate is still below the poverty line of £165 a week for a lone adult used by the influential Institute of Fiscal Studies, though pensioner couples would just exceed poverty income as defined by the IFS.

There were concerns raised about nearly 7 million workers who currently pay lower national insurance contributions (NICs) in return for not claiming more than the basic state pension of £107 a week: under the plans these employees – mostly in the public sector – would no longer opt out of the full pension and would have to increase their NICs by 1.4% of their income.

Another concern is that currently nearly 7 million workers opt out of the state second pension, earning their employers a rebate from the government that would be worth an estimated £5.9bn in 2017 – money that they would lose under the new system. This loss of income would mostly affect public sector employers such as schools and hospitals. Private companies who opted out would be allowed to change their occupational schemes to offset the extra cost. Webb said the future government of the day would decide what to do with this extra income, raising fears that those organisations would suffer huge budget cuts.

The white paper also revealed that the majority of those who retired in or after 2060 would be worse off than under the current system. In an independent report, the IFS went further, claiming anybody born in or after 1986 – and possibly before that – was more likely to lose out under the new system than the existing one.

Government would still raise spending on pension-age benefits from 6.9% of gross domestic product currently to 8.1% in 2060, though this would be lower than the 8.5% projected under the current system, said the Department for Work and Pensions.

Overall the proposals were widely welcomed by pensions experts and businesses, who argue a simpler single-rate pension which does not penalise people for paying into additional private pension schemes will encourage more people to save extra for retirement.

"The message is now very simple: if you want more than £7,500 a year to live on in retirement, you need to start saving," said Tom McPhail, head of pensions research for Hargreaves Lansdown, investment advisers.

Dot Gibson, National Pensioners Convention general secretary, said: "Even at today's prices, £144 a week still represents a state pension that is well below the official poverty line for older people – and will still mean that millions of future pensioners will struggle to make ends meet."

There was also support for the government's attempts to deal with what Webb admitted was the "messy" transition from the current to the new system by protecting the pensions of anybody who has or would retire on a higher income in 2017.

"These proposals are not perfect … but the greater good is served," said Malcolm Small, senior pensions policy adviser for the Institute of Directors.

The government has already extended the retirement age to 66 from 2020 and 67 from 2028, raised the state pension each year in line with the higher of average earnings, prices or 2.5% a year, and enrolled all workers into their company pension unless they opt out.

More on this story

More on this story

  • State pension reform unveils future £144 per week flat payment

  • Webb's pension contribution proves simply baffling

  • Pension changes make sense but will leave many worse off

  • Single-tier pension Q&A: what the state pension changes mean to you

  • Pensions reform outlined by minister - video

  • Flat-rate state pension branded a con trick by OAP group

  • New flat-rate state pension announced: politics live blog

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