Written evidence from HM Treasury
PAC HEARING ON
2 MARCH 2011
At the PAC hearing on Wednesday 2 March on Public
Service Pensions, I promised to provide you with notes explaining
the following:
(i) Contracting out, and increasing the basic
state pension;
(ii) Senior civil service pensions; and
(iii) Long-term GDP growth projections.
(i) Contracting out, and increasing the basic
state pension
The State Pension has two components:
- The basic State Pension is a contributory pension—the
amount an individual receives depends on the number of qualifying
National Insurance years they have. A full basic State Pension
is currently £97.65; and
- The State Second Pension is the earnings-related
State Pension paid on top of the basic State Pension.
Individuals can choose to "contract out"
of the State Second Pension. In return for not accruing rights
to the State Second Pension in later life, an individual and their
employer both receive a National Insurance rebate. From April
2012, those in defined contribution pension schemes will no longer
be able to contract out. This change has already been included
in the public finance forecasts.
The Committee discussed by how much the basic State
Pension could increase if contracting out were to be abolished
and the money recycled into the basic State Pension. The following
analysis is based on the published cost of the contracting out
rebate calculated using the current rebate levels.[1]
The contracting out rebate (given current rebate
levels) is forecast to cost £6.8 billion in 2012-13. And
12.7 million individuals are forecast to receive a basic State
Pension in 2012-13. This implies that ending contracting out could
fund circa £10 a week rise for each basic State Pension recipient.
However, not all basic State Pension recipients receive
a full basic State Pension. Further, the increase in basic State
Pension could reduce the amount of income-related benefits some
pensioners receive. If these effects were taken into account,
ending contracting out in 2012-13 could increase a full basic
State Pension by circa £15 a week.
While this change would be funded in 2012-13, there
would be a net Exchequer cost over time:
- The number of basic State Pension recipients
is increasing, and this additional basic State Pension would increase
by the triple guarantee (as the basic State Pension rises by the
highest of earnings, prices, or 2.5%). However, the cost of the
rebate in cash terms rises more slowly. This could lead to an
unfunded cost of circa £1 billion in 2016; and
- Those individuals who are no longer contracted
out will now accrue rights to the State Second Pension. Although
these costs build more slowly (for example circa £100 million
in 2018-19), there would be a significant increase in spending
in the long term. Abolishing contracting out and increasing the
basic State Pension represents an intergenerational transfer from
working age people today to current pensioners.
(ii) Senior civil service pensions
Individual employers' Remuneration Reports (in Departmental
Resource Accounts) include details of the pension benefits and
Cash Equivalent Transfer Values (CETVs) of each of the members
of the department's senior management team. These are available
online on an employer by employer basis, but are not collated
centrally.
However as an example, the following central departments
had scheme members with CETVs near or above £2 million as
of 31 March 2010:
| Department | Name
| £ million |
| Cabinet Office | Sir Gus O'Donnell
| 2.322 |
| Stephen Laws | 2.401
|
| Foreign and Commonwealth Office | Peter Ricketts
| 1.812 |
| Home Office | Sir David Normington
| 1.988 |
| Peter Makeham | 1.916
|
| Ministry of Justice | Phil Wheatley
| 1.891 |
| HMRC and Treasury | None
|
BACKGROUND TO
CETVS
The Cash Equivalent Transfer Value (CETV) is the capital value
of an individual's pension and is calculated using guidance from
the Scheme Actuary. It is an assessment of what it costs the scheme
to provide the pension benefits. MyCSP, who are the Civil Service
scheme's administrator, provide CETVs as of 31 March each year.
(iii) Long-term GDP growth projections
The OBR published its Economic and Fiscal Outlook in November
2010, in which it projected real economic growth of 2.2% per year
on average, between 2016 and 2050. This was based on assumptions
about growth in productivity (output per head), the population
and employment.
Longer term growth rates will be updated annually in the fiscal
sustainability report due to be published in the summer.
9 March 2011
1
In February 2011, the Government announced that the rebate on
earnings will be reduced from April 2012. This change has not
yet been included in the published public finance forecast. Back
| 
