Public sector pension contributions to rise by 3%
Following a public consultation, the government has decided that the discount rate for calculating unfunded public service pension contribution rates should be based on GDP growth.
A discount rate of 3% above the consumer prices index (CPI) will now be used.
According to the Office of Budget Responsibility, long-term GDP growth is equivalent to a discount rate of 2.9% above CPI, however the government has rounded this to 3%.
"We're not asking for more than 3%," Osborne announced. "There should be no cherry-picking with this, and MPs' pensions will be included."
The taxpayer will pick up the rest of the impact of revising the discount rate, says Aon Consulting.
The government proposes to review the level of discount rate every ﬁve years, and the methodology every 10 years. It also stresses that this change in the discount rate will not lead to an increase in member contribution rates beyond those already announced in the Spending Review last year.
Joanne Segars, chief executive of the National Association of Pension Funds, comments:
"It is encouraging that the government has formally accepted Hutton's report and has pledged not to cherry-pick from it. But it should think carefully about how and when it increases employee contributions into pensions.
"Public sector workers are facing uncertainty about jobs and pay, and a significant hike in contributions could spur many to quit their pensions."
The government will set out further proposals in the autumn regarding public sector pensions, and respond to Lord Hutton's Independent Public Service Pensions Commission, which was published on 10 March.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).