As a consequence of ending the additional pension for those reaching pension age after 2016, we are ending contracting-out. This means that individuals in defined benefit schemes—public sector and private sector—and their employers will no longer be entitled to pay a lower rate of national insurance contributions by contracting out of the state second pension. At the moment, they receive a rebate of 1.4% for employees and 3.4% for employers on earnings up to £40,000.
The abolition of contracting out will result in additional national insurance revenue for the Exchequer. Of this, about £4 billion is national insurance contributions from public sector employers and employees. That is the money that the noble Lord, Lord Whitty, is most concerned about.
The extra information that I can provide to my noble friend Lord Flight is that the cost of the public sector schemes of paying extra employer national insurance is about £3 billion per annum. We do not have any breakdown of which schemes are at local authority level. I will speak to Her Majesty’s Treasury to find out whether any further information is available.
Noble Lords will know that the Government have not set a fixed spending envelope, nor one for individual departmental budgets, beyond 2015-16, and contracting out is abolished in 2016-17, so is outside the current settlement. Public sector employers will have to absorb the burden, as is always the case with tax changes. Any
spending review in the next Parliament will, of course, consider the £4 billion cost in the round. This does not affect our commitments on protecting spending on health and education in this Parliament. Treasury officials have already met with Local Government Association officials concerning the impact on the local government pension scheme. This follows conversations between the Chief Secretary and the Local Government Association, and I would expect similar discussions to take place concerning other schemes when settlements are set.
Turning to the noble Lord’s amendments, I note that he moved back from 1966 to 1963, but then he would, would he not? The amendments would effectively defer the loss of the rebate to public service pension schemes for two years—until April 2018—but in doing so would defer the introduction of the single tier to more than 4 million people.
Amendments 19, 20 and 21 would change Clause 4 by redefining pre and post-commencement qualifying years, so that public service pension scheme members have them counted up to and from 2018 rather than 2016. Amendment 24 would change Schedule 1—the detail of the transition—to bring into account the old scheme and introduce the new scheme two years later for public sector workers, with a tidying-up clause in Amendment 43.
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Taking these amendments forward would not be fair to public sector workers caught in the old scheme. These people cannot start to build single-tier qualifying years until 2018, which will mean a loss for some contracted-out workers of £8.22 a week pension for the rest of their lives at the £144 illustrative level of the full single-tier pension.
On the other side of the coin, it would not be fair to some private sector workers, who lose out on benefits such as derived entitlement but see public sector workers still entitled. As for private sector workers who have spouses who are public sector workers and vice versa, it will certainly keep the officials busy trying to work out all that.
On Amendment 42, I assure the noble Lord that we are confident that the clause as drafted properly defines the public sector schemes to be so exempted.
Amendment 41 would have an amount equivalent to the revenue raised by the Government through the withdrawal of national insurance contracted-out rebate from public sector schemes paid back to public sector schemes. The noble Lord knows that we cannot have a two-tier state pension system with people of exactly the same state pension age being treated differently based on whether they were in the public or private sector. The removal of the rebate is entirely necessary and in keeping with simplifying a state pension system that is incredibly complex; and the chief source of complexity is, indeed, the arrangements we have to make for people being contracted out.
As for the definition of a public pension scheme, which was raised by my noble friend Lord German, that is set up under legislation. It is the nature of the scheme that makes it a public service scheme, not how those employees are actually employed.
As for the “nod and wink” indicated by the noble Lord, local government is not being treated differently to other government departments; both will be considered as part of the spending review in the next Parliament. The noble Lord made his points well about public service pension schemes. My Department is seeking to arrange a round table in the new year with the LGA and the Treasury, and we might have limited room for some noble Lords to join that round table. If I am overwhelmed, I will have to be more selective. Therefore I ask the noble Lord to withdraw these groups of amendments.