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Pension contributions to increase from 2012

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Public sector workers will have to pay more towards their pensions but the low paid will be protected under the changes, the chancellor has announced.

George Osborne, left, said he had accepted key aspects from Lord Hutton’s report on public sector pensions that employee contributions should be increased and that public sector employers should continue to provide a “gold standard” defined benefit pension for its workforce.

Although the Treasury will not set out details of the contribution increases until after Lord Hutton’s final report is published next year, he said the changes would be phased in from April 2012 and would lead to an additional saving of £1.8bn a year by 2014-15, “over and above the plans left by the last government”.

The department has calculated that the average increase per worker will be 3%, but that will vary from individual to individual because the low paid and the armed forces are set to be protected from the change. Mr Osborne also said the changes would be staggered.

The chancellor also announced that there would be a consultation on the future of the Fair Deal protection for public sector workers who transferred to private sector employers as part of outsourcing arrangements. A decision is to be made in the summer of next year, also after Lord Hutton, left, delivers his final report.

Public sector workers would get a “new pension deal” and, borrowing a phrase from Lord Hutton’s report, the chancellor said there would be “no race to bottom of pension provision”.

He said: “We want public service pensions to be a gold standard. At the same time, we should accept that they must be affordable.”

Taxpayers made half the contributions when public service pensions were established in the 1950s but that had now risen to two-thirds and needed to change, he said.

In his spending review speech, the chancellor also revealed that MPs were likely to lose their final salary pension scheme just as public sector workers were and said that the gradual increase of the state pension age to 66 was to be sped up.

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