By Marcus Leach

The Government will start formal consultations on increasing public service pension contributions in 2012-13 by the end of this month, Chief Secretary to the Treasury Danny Alexander said, as he set out plans for talks on reform to continue into the autumn.

The Government and the TUC have agreed that to further inform the discussions on Lord Hutton’s recommendations, initial discussions on reform should be opened at a scheme by scheme level. The central process will continue alongside this. These discussions are necessary to ensure a fuller understanding of the implications of reforms, before final conclusions are reached.

To meet the target of £1.2 billion savings set out in the Spending Review for 2012-13, schemes will shortly begin consultation on their proposals for member contribution increases from April 2012. These consultations will only relate to delivering these savings in the first year (40 per cent of the average 3.2 percentage point increase). They will begin by the end of July and be completed by the end of October, in order to ensure implementation from April 2012.

The Government remains committed to securing the full Spending Review savings of £2.3 billion in 2013-14 and £2.8 billion in 2014-15, requiring each scheme to find savings equivalent to a 3.2 percentage point increase in member contributions. Separate scheme specific discussions will make proposals by the end of October on how these savings are achieved.

The Government has made clear that lower earners should be protected from the impact of any contribution increases. Today the Government proposed that there should be no increase in member contributions for those earning under £15,000 and no more than a 1.5 percentage point increase in total (before tax relief) by 2014-15 for those earning up to £21,000. This means 750,000 people should pay no extra contributions and another 1 million should pay no more than 1.5 per cent extra. This amounts to a 0.6 percentage point increase in 2012-13 on a pro-rata basis.

The total increase will be capped at 6 percentage points (before tax relief) by 2014-15 for the highest earners. This amounts to a 2.4 percentage point cap (before tax relief) in 2012-13 on a pro-rata basis.

Lord Hutton’s recommendations will inform scheme level discussions and the Government will provide scheme specific cost ceilings (a total cap on the cost of a scheme). These will ensure that public service pensions remain affordable and sustainable by setting a limit on the contribution made by the Government and ultimately the taxpayer.

Cost ceilings will be based on Lord Hutton’s proposals but will go further and ensure that the pension individuals receive at normal pension age would be broadly as generous for low and middle income earners as it is now. Scheme talks will be asked to provide initial proposals for reformed schemes by the end of October 2011.

Cost ceilings alone cannot manage the risks that taxpayers are exposed to in defined benefit schemes. This is why Lord Hutton recommended that the normal pension age should be linked to the State Pension Age. The Government continues strongly to believe that this is the right approach to managing the rising and uncertain risks of longevity. Scheme talks will also consider their preferred approach to managing risks, especially longevity risk. However, since risks ultimately lie with the taxpayer any approach will need to be agreed with the Treasury.

Chief Secretary to the Treasury, Danny Alexander, said:

“The Government and the TUC have held a series of constructive meetings to discuss public service pension reform and have now agreed that to further inform the discussions on Lord Hutton’s recommendations, there should be scheme level discussions alongside the central process already established.

“I can also confirm today that to deliver the first year’s savings of £1.2 billion through employee contribution increases, scheme-by-scheme consultations for the unfunded public service pension schemes will commence by the end of this month. The Government remains committed to securing the full Spending Review savings of £2.3 billion in 2013-14 and £2.8 billion in 2014-15.”

For Local Government, the Government recognises that the funded nature of the scheme puts it in a different position and will discuss whether there are alternative ways to deliver some or all of the savings in respect of contribution increases.

There will be a further meeting between the Government and the TUC to review progress at the end of September.