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Pension change to cost £1bn a year

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Plans to simplify state pension rules are set to cost council employers £1bn a year and employees £300m a year, a union leader has warned.

Actuaries have also warned that the increased costs caused by the introduction of a single tier state pension are set to wipe out the savings produced by the ongoing reforms to the Local Government Pension Scheme.

GMB’s general secretary for public services Brian Strutton, below, described the new flat-rate state pension as “a massive stealth tax on around seven million workers and their employers”.

The warnings came as the chancellor warned public sector employers they would have to absorb the cost of the extra National Insurance contributions which must be paid as employees’ right to opt out of the second state pension is abolished.

He said the additional cost from 2016-17 would taken into account in future spending reviews, but Mr Strutton said this was not reassurance enough.

“For the local government sector alone it means an extra employer NI contribution of about £1bn per annum and about £300m from employees,” he said. “There is nowhere for this money to come from and I have asked the pensions minister Steve Webb to engage with us to try to solve the problem but I suspect the battle will be with Treasury rather than him.”

John Wright, partner at actuarial firm Hymans Robertson, confirmed that public sector employers including councils were set to be “real losers” thanks to the change although they estimated the cost to council employers to be a maximum of £800m.

“Such employers were supposed to see reduced pension costs following the reforms which have been nearly three years in the making. It is regrettable that the cost reductions from pension reforms will be wiped out at a stroke by these DWP proposals, due to the higher National Insurance contributions which public service employers will have to pay.”

Mr Wright, right, added: “Westminster has reformed public sector pensions to make modest savings on the one hand, only to take these away and add further costs with the other. Unless the pension reforms are amended, to counteract the added costs from these DWP proposals, then public services will suffer further.”

Hyamns Robertson actuaries also pointed out that while the chancellor’s reassurance of spending review compensation might help local government employers, it would not necessarily assist the many non-public sector employers in the Local Government Pension Scheme such as charities and contractors.

Questions have also been asked about the impact on the morale of council staff who have been told they will have to pay extra National Insurance contributions after a three year pay freeze.

Steve Simkins, KPMG’s head of public sector pensions, said staff might struggle to find comfort in the chancellor’s point that they will receive larger pensions in the long term.

“Morale across the public sector is already fragile, so the decision to drive up National Insurance contributions will put further strain on employee engagement,” he said. “Although the higher pension and National Insurance contributions represent a good investment, they will become increasingly difficult for many to afford.”

The DWP confirmed on Tuesday that the single tier state pension will be introduced in 2016, a year earlier than previously planned.

The change is aimed at simplifying the state pension by closing the state second pension and means the end of the National Insurance rebate for those employees who choose to opt out of the second state pension.

Private sector employers are also set to see increase National Insurance costs, but the government has said they can adjust pension contributions to their pension schemes to compensate.

Pay

The Budget provided news on other areas of future workforce costs for local government with a warning that the 1% public sector pay cap would be extended to 2015-16. The chancellor has no say over council pay awards but he said local government budgets would be adjusted accordingly.

He also indicated that he wanted to end progression pay increase in the civil service.

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