End public sector pension contracting out subsidy
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Pensions expert Ros Altmann is urging John Hutton to reform contracting out rules in a bid to save cash and remedy “unfairness” in the pension system, as part of his review of public sector pensions.
Responding to his Commission’s consultation, Altmann says the complexity of contracting out has allowed an anomaly for unfunded public sector pension schemes, which costs taxpayers billions of pounds every year.
Public sector workers pay just 9.4 per cent national insurance instead of the full 11 per cent while public sector employers pay just 9.1 per cent instead of the full 12.8 per cent.
Altmann says allowing these unfunded schemes to contract out costs over £6bn a year in lost revenue.
Altmann says these subsidies mean public sector workers are getting their state second pension for free and receive it earlier than the state pension age.
She says if Hutton is looking for short-term and longer-term cost savings he must seriously consider reforming these rules.
She says: “People are only allowed to pay lower NI if the Government does not have to fund their S2P on retirement. But allowing unfunded public sector schemes to pay the lower rate of NI makes no sense because the Government does have to pay S2P as part of the public sector pension scheme benefits.
“The reality is that public sector workers and their employers are wrongly paying the lower NI rate today, saving themselves money now, but the Government has to pay S2P in future, costing much more later. Public sector workers have not contributed to their S2P, they get it for free, under cover of the complexities of the UK’s unique contracting out system.
“Ending contracting out could potentially generate significant savings for the Treasury immediately. By ensuring that workers do start paying for their S2P properly, they will have to pay the correct full rate of National Insurance.
“Requiring public sector employers to pay the full rate of National Insurance would end the current hidden subsidy to public sector employment but the savings are less clear cut. These employers will have to reduce spending elsewhere in order to be able to afford the higher NI payments that they should have been paying all along. However, they will finally be paying the proper rate, rather than being able to employ public sector workers with an unfair advantage over private sector employers.”
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Readers' comments (7)
Peter | 3 Aug 2010 9:38 am
Please make this lady the Pensions Minister!!
At last somebody is talking sense about pensions.
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Richard | 3 Aug 2010 9:48 am
Why just pick on the S2P element of their pension? What Ros has said is true, but surely true for the whole of their benefit. Looks like a case of jumping on the 'bash public sector pension bandwagon'?
Yes, they do get a good deal, by why want to reduce everything to the lowest possible level?
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Rocket Scientist | 3 Aug 2010 11:25 am
Dr Ros is right agan; Richard (9:48am) I'm afraid we need to save money. This would help in a move towards a more level playing field and isn't a huge cost to those scheme member. 95% of my clients are members of one of the largest public sector schemes, but I'm afraid they've had it too good for too long.
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Alistair Niven | 3 Aug 2010 2:00 pm
Ros Altmann is invariably correct because she understands pensions. She should asked by the Coalition to bring some sanity to the provision of long term savings and pension provision. Pensions Ministers whilst they may be well meaning they have no stomach for taking the action needed.
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Manj Rai | 4 Aug 2010 2:44 pm
Actually in this case Ros Altmann has got it wrong.
ALL the main public sector schemes (LGPS, Civil SErvice, NHS, Police etc) are "contracted-out". Which means you DO NOT get S2P while a member of these schemes
Also the NI rates that she quotes are indentical to those paid by members of private sector final salary schemes. THere is no difference between public and private secotr employers here.
Even on the subject of getting GMP at age 60 (as is the case for men in public sector schemes) you do not get your full GMP at this age - the full amount is not paid until age 65 the same as private sector schemes
So it is all a nonsense. Also this is not new - she has been going on about this for around 2 years.
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The Essex Serpent | 25 Aug 2010 10:13 am
As usual Ms Altman you are talking utter nonsense.
If you are in a contracted-out scheme you don't get S2P regardless of whether you are in a private sector or public sector scheme.
How this self-styled 'pensions expert' is treated with any degree of credibility is beyond me.
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Anonymous | 28 Aug 2010 11:11 am
It is frightening how much vitriol is being heaped on public sector pension schemes because of rabble rousing based on 'my private pension is rubbish so yours should be too'. The statement from Ms Altmann is simply wrong. I pay 11% contributions and my pension is reduced by the value of the s2p when I reach the state retirement age. Just more daily hate style prejudice I'm afraid.
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