Public sector pension contributions may rise £4bn

Public sector workers may have to pay up to £4 billion more a year into their pension schemes following a consultation on the way their contributions are calculated, it emerged today.

The Treasury plans to launch a consultation on the so-called discount rate used to calculate the amount public sector employees pay into unfunded pension schemes.

The discount rate is used to work out how much workers should pay into pension schemes based on much the pensions they draw during retirement will be devalued by between now and when they retire.

The higher the discount rate is, the lower the contribution levels are that workers have to make to their scheme.

In his recent report on public sector pensions, Lord Hutton said he thought the current discount rate may be too high.

He said reducing the discount rate by 0.5% per annum could increase the amount workers contributed by 3% of their pay a year, bringing in an extra £3 billion to £4 billion annually, and he called for the Government to run a consultation on the issue.

The additional money would be on top of the £2.8 billion a year contribution rise that workers already face following changes introduced by the previous government and increases in contributions averaging 3% of pay, which are due to come into force next year.

In his report on public sector pensions, former Labour Cabinet minister Lord Hutton said long-term structural reform was needed, including an end to the current final salary schemes, increases in employee contributions and later retirement ages.

A Treasury Spokeswoman said: "The Government accepted the conclusions of Lord Hutton's interim report on public service pensions and in the spending review committed to continuing with a form of defined benefit pension.

"The Government will await his final report before determining the nature of the benefit and the precise level of progressive contribution required, and will carry out a public consultation on the discount rate used to set contribution rates, as recommended in the interim report."

TUC general secretary Brendan Barber said: "The Government would be ill-advised to alter the discount rate.

"It is used to assess much more than the future cost of public sector pensions - changing it could have unforeseen consequences across Government investment plans, and make many worthwhile projects suddenly look too expensive.

"The Government has already signalled an intention to sharply raise public sector pension contributions. Some schemes are currently being revalued which could also result in higher contributions.

"Increasing the discount rate in order to further increase contributions would be a step too far and would simply lead to many hard pressed public sector staff - particularly the low-paid - walking away from their pensions."