Public sector faces £2bn-a-year bill to plug the gold-plated pensions gap for its workers

PUBLIC services including the NHS, schools and the police face a new £5 billion squeeze to plug a growing pension “black hole” and preserve generous “gold-plated” retirement benefits for millions of public sector workers.

George Osborne announced yesterday that from 2019, the Government will add an extra £2 billion a year to the cost of “unfunded” public sector pensions by changing the way the benefits are calculated. From this date a lower “discount rate” will be used to establish their value, meaning they become more expensive to fund.

Public sector workers’ pensions will be unaffected by the change, the Government confirmed. It also claims the extra cost is “affordable for public sector employers”.

The policy comes just as an extra £3.2 billion cost to the same departments is being created by the introduction of the new state pension in April, when public servants’ national insurance contributions will increase by several hundred pounds each. Analysis for The Daily Telegraph shows this change will cost the NHS £1 billion a year, while the extra costs across local councils will be £750 million a year.

At present, public sector employers receive rebates on national insurance paid on behalf of staff, but these rebates are being removed on April 6 to coincide with the new state pension.

It means schools will be forced to give up 2.5 per cent of their budgets over the next five years to pay for extra national insurance contributions for staff, according to the Institute for Fiscal Studies.

Currently, employers are obliged to pay the Government national insurance on behalf of staff but receive a discount for workers who swapped a part of their state pension in return for final salary pension. But from April this discount will end, leaving employers to pick up the tab.

Calculations made by Barnett Waddingham, a pension firm, show the employer-funded element of a higherrate taxpayer’s national insurance contributions are worth £1,163 a year, or £142 for someone earning £10,000 a year.

Private sector employers can adjust staff benefits to make up for the losses, but as public sector workers’ pensions are specially protected under statutory law, government departments will be required to make up the difference.

Steve Webb, a former pensions minister, told the Telegraph that the Chancellor “pocketed” the rebate some years ago and has not specifically given schools and hospitals extra money to pay the higher costs of employing teachers.

“This means departments will face a spending squeeze from April,” he said.

Paul Middleman, head of public sector actuarial and benefits at Mercer, the human resources firm, said: “The Chancellor announced that the ‘SCAPE’ discount rate used to assess the cost of public sector pension provision will reduce by 0.2 per cent a year.

“The estimated increase in employer contributions for the main unfunded public sector schemes from 2019-20 is around £2 billion a year or approximately 2 per cent of pay.

“In a climate where financial resources continue to be stretched, the employers contributing to these pension schemes may not necessarily agree with the Treasury’s statement that this is affordable”.

Higher-rate taxpayers were spared a cut in the amount that can be saved in a pension each year in yesterday’s Budget.

The Chancellor had already signalled that he would not cut the rates of relief on pension saving, which effectively mean contributions are untaxed. But it was feared that the limit on saving, currently £40,000 for most people, would be reduced.

The figure was cut in 2014 to £50,000, which followed repeated reductions by the coalition government. A decade ago it stood at £255,000.