The Government could be set for another collision with trade unions after pensions minister Steve Webb confirmed contracting-out will not be included in the 25-year public sector reform agreement.
Under proposed changes to public sector pensions, contributions will increase by 3 per cent on average and benefits will be based on career average rather than final-salary earnings.
Government plans to introduce a new flat-rate state pension worth £140 a week would see the abolition of contracting-out for defined-benefit schemes, including those in the public sector.
As a result, public sector workers would need to pay an extra 1.4 per cent into their scheme because they would no longer receive a rebate for being contracted-out of the state pension – despite Treasury commitments not to change public sector pension benefits for at least 25 years.
In an interview with Money Marketing, Webb says: “We will make it clear that we are not including contracting-out in the 25-year promise.
“The public sector actually does very well out of this. It has to pay more in but it gets the full benefit of the extra National Insurance.
“Public sector workers’ accrual will not be touched, so they get a hell of a good deal. I have mentioned this to a senior union official but it is not an issue that has come onto their agenda yet.”
Syndaxi Chartered Financial Planners managing director Robert Reid says: “I cannot see the unions going for this. This could turn into a big problem for the Government.”