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Govt and Labour clash over £700m contracting-out override plans

Gregg McClymont

The Government and Labour have clashed over proposals to allow employers to cut members’ pensions in order to compensate for the loss of the contracting-out rebate.

Government plans to introduce a single tier state pension worth around £144 a week from April 2016 will see contracting-out abolished. As a result, employers with defined benefit schemes that had previously been contracted-out of the state pension will have to pay an extra 3.4 per cent in National Insurance contributions.

In the March Budget, Chancellor George Osborne confirmed the Government would introduce a statutory override to allow private sector employers to pass on the cost of losing the rebate to employees without consulting the scheme’s trustees.

This could be through higher member contributions or lower accrual rates.

Labour shadow pensions minister Gregg McClymont has put forward an amendment to the Pensions Bill which would force employers to get consent from the scheme trustees before reducing members’ benefits.

He says: “This is a thorny issue. We suggest in the amendment that trustee consent should be required to make the changes.

“For example, we heard from witnesses from the employee side of the argument that the ending of contracting-out and the associated increase in employer NI is in principle no different from any other risk employers with DB schemes might face, and there is no sound justification for the Government disturbing the existing balance of power in the schemes.”

Responding for the Government, pensions minister Steve Webb says losing the NI rebate will cost private sector employers around £700m.

He says: “I am of the view that if we say to employers that, when push comes to shove, they may not be able to recover that money, if this coffin has any room for more nails in it, that would be the final nail; it really would kill off DB.

“If the firm were to say, ‘Well, we won’t kill off the DB scheme, but we will recover the money through lower pay rises and pay cuts’, that would be incident on the entire work force.

“The members of the DB scheme would keep their rights, but the entire work force of the firm would pay for it.

“It would be unfair to leave firms no way of taking the money from the members of the scheme, but allow them to recoup it from people who are not in the scheme.”

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