Public sector pension contributions to rise by 3%

23 March 2011

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.

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