Influential think-tank the Centre for Policy Studies has warned public service pensions will cost an extra £7.4bn a year as a result of a “toxic tangle” with proposed state pension reforms.
Last month, the Government published a long-awaited white paper detailing plans to introduce a single tier state pension worth £144 a week for future retirees.
The publication of the white paper was delayed twice as policymakers wrestled with the complex issue of contracting-out.
CPS research fellow Michael Johnson says the reforms – which are due to be implemented in April 2017 at the earliest – will load an extra £7.4bn a year onto the cost of public sector pensions.
Around £3.4bn of this comes from the loss of the public sector employers’ National Insurance rebate following the abolition of contracting-out.
The additional £4bn follows the decision to allow contracted-out workers to continue to build up state pension entitlement up to the £144 a week single tier level.
Johnson claims a further £2bn in costs could arise because the life expectancy assumptions used by Lord Hutton in his review of public sector pensions are now out of date.
He says the Public Service Pensions bill should be halted until the cost implications of introducing the single tier have been “fully examined”.
Johnson says: “The need for bolder reform of public sector pensions is far greater than that proposed in the Public Service Pensions Bill.
“The Coalition must act now to untangle the expensive consequences of the interaction between its various pension reform proposals.”
Centre for Policy Studies director Tim Knox says: “Lord Hutton claimed that his proposals for public sector pension reform would be fair, sustainable and balanced; and that taxpayers can have confidence that the costs are controlled.
“Sadly, none of this is true. Taken together, the Coalition’s pension proposals are unfair and the costs – at £1,600 a year for every household – are clearly not controlled. This is clearly unsustainable.”
A Department for Work and Pensions spokeswoman says: “We simply do not recognise the figures as presented. The new single tier state pension will be more sustainable and cost the taxpayer no more than the current system.
“To make the state pension simpler and easier to understand, contracting-out must end, meaning both employees and employers across the public and private sectors will pay National Insurance at the standard rate.”