The government’s proposals to reform the state pension will lead to employers with occupational pension schemes paying higher national insurance contributions (NICs), according to analysis conducted by the Pensions Policy Institute (PPI).
The PPI’s report, An Assessment of the Government’s Options for State Pension Reform, released in conjunction with the National Association of Pension Funds (NAPF) on 28 June, stated that plans to introduce a single-tier state pension would increase the government’s national insurance (NI) revenue by £6 billion in 2016, £5 billion of which would come from public sector pension schemes and £1 billion from private sector pension schemes.
As a result, a single-tier pension could place additional pressure on employers and employees in defined benefit (DB) schemes in both public and private sectors as NI contributions would increase.†
Employers with DB schemes would pay higher NI contributions (£3.4 billion for public sector employers and £0.8 billion for private sector employers in 2016, on 2011 earnings terms), and would have to choose whether to reform their schemes in response to the reform.
Employees in DB schemes would pay higher NI contributions (£1.4 billion for public sector employees, £0.3 billion for private sector employees in 2016, on 2011 earnings terms), but the impact on their pension incomes would depend on how employers react to the abolition of contracting-out.
Niki Cleal, director of the PPI, said: “The single-tier pension could place additional burdens on employers and employees in defined benefit schemes in both the public and private sectors as NICs would increase.†
“The final impact on private pension scheme members would depend on how employers reacted to the government’s state pension reforms. ”
Joanne Segars, chief executive of the NAPF, aded: “Final salary pensions have taken a lot of hits over the years, and the lost of contracting-out could create yet more administration costs.†
“With the right support from the government schemes can make these changes and be put on a firmer financial footing.”
Meanwhile, the government’s plans to accelerate the flat-rating of the state-second pension into two flat-rate state pensions by 2020 is the other option being proposed by the government as part of the reforms.
Under this option employers with contracted-out DB schemes pay lower NI rates than those with schemes that are contracted-in.
If the state-second pension becomes a flat-rate, people will only be able to accrue a benefit of £1.60 per week (in 2010 earnings terms) for every year of accrual. This, said the PPI, would mean that the NIC rebate would be capped at the actuarial equivalent of the accrued flat-rate benefit, rather than reflecting the level of member earnings, as in today’s system.
When the contracted-out rebate falls from 5.3% to 4.8% from 2012, employees in contracted-out schemes will also have to pay higher NICs.
The government has issued a green paper called A State Pension for the 21st Century which contains two proposals for reform of the state pension system: an acceleration of the flat-rating of the state second pension (S2P) so that the state pension evolves into a two-tier flat-rate pension by 2020, and the creation of a single-tier flat-rate pension set at £140 per week (in 2010 earnings terms).
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