Radical shake-up of state pensions is 'fair', Prime Minister insists

David Cameron today defended the Government's plan to introduce a single "flat-rate" state pension which could result in some workers facing higher National Insurance contributions to pay for it.

Mr Cameron said plans for a unified pension rate - equivalent to around £144 in today's money, and due to be introduced for new pensioners from 2017 was "fair".

"This will help a lot of women and a lot of lower paid workers who otherwise wouldn't get a decent state pension," said Mr Cameron.

Ministers said the reform will create a simple flat-rate pension set above the means test (currently £142.70) and based on 35 years of National Insurance contributions, and will "hugely benefit" women, low earners and the self-employed, who under existing rules find it almost impossible to earn a full state pension.

However around six million workers will face higher National Insurance payments in future as the practice of "contracting out" the state second pension to employers is ended.

Those affected are expected to include more than a million private sector staff enrolled in final salary schemes, and an estimated five million public sector workers.

The GMB union said there could be "very serious consequences" which could affect an agreement on public sector pensions, while the National Pensioners Convention (NPC) described today's White Paper as little more than a "con trick" for future generations, by offering them less than they get now, asking them to pay more and work longer before they can get it back.

But ministers will argue that, by replacing today's complex system of add-ons and means-testing, the single tier will provide certainty to people about what they will get from the state and provide a better platform for them to save for their retirement.

Work and Pensions Secretary Iain Duncan Smith said: "This reform is good news for women who for too long have been effectively punished by the current system.

"The single tier will mean that more women can get a full state pension in their own right, and stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family."

Pensions Minister Steve Webb said: "The current state pension system is too complicated and leaves millions of people needing means-tested top-ups. We can do better.

"Our simple, single tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save."

Brian Strutton, national officer of the GMB union, said a new flat-rate pension should be fairer than the present arrangements, but warned of a "very serious consequence" of the Coalition's plans.

"That is the increase in National Insurance contributions that employers and employees in defined benefit pension schemes will have to pay," he said.

"For employers that is 3.4% of the NI ranking earnings and for the six million employees affected it will be an extra 1.4%. Most DB scheme employers and members will find this unaffordable so will need to renegotiate their schemes.

"A good example is the Local Government Pension Scheme which has just been reformed by unions and government and would face an unaffordable extra NI bill of several hundred million pounds.

"Just as the Treasury legislation to reform public sector pensions is going through Parliament, the Department for Work and Pensions (DWP) is proposing to blow it all out of the water by completely rewriting the state and occupational pension landscape."

Mr Strutton said the Treasury and DWP needed to "get their act together" to avoid reopening the public service pension deals, adding: "Abolition of the contracting out NI rebate will impose a £6 billion new tax burden on workers and companies which may be a nice windfall for the Chancellor but is not fair to those who will have to pay more tax."

Unions have been embroiled in a bitter dispute with the Government over its controversial public sector pension reforms, which led to a series of strikes.

An agreement was struck in local government, but unions in other areas have refused to sign up to new arrangements.

NPC general secretary Dot Gibson said: "The White Paper offers nothing to existing pensioners and leaves many of them to struggle on lower pensions and a complicated means-testing system.

"The worst affected will be around five million older women who don't have a pension anywhere near £144 a week and would clearly benefit if they were included in the new arrangements, but look like they are going to miss out.

"This will only add insult to injury to millions who have already made a contribution to our society but are still living in poverty.

"The outlook for future generations of pensioners is even worse. They are being asked to pay an extra five years worth of National Insurance contributions, work longer before they can retire and end up with less than they can get today. At the moment you only need to contribute for 30 years in order to get a full state pension, and if you do, you can get £150 a week when you retire at 65.

"What the Government is trying to sell is a plan for people to pay in for 35 years, get £144 a week and have to wait at least until 68 before they can collect it. No-one should be taken in by what is little more than a con trick."

Shadow pensions minister Gregg McClymont said the Coalition had originally suggested the reforms would be introduced in 2016.

"The chaos surrounding the Government's relaunch gets worse and worse. These pensions proposals are just half a plan yet they are still delayed by a year," he said.

"With the granny tax, this Government has already established a track record of incompetence and secrecy so we will look at the detail, but the Government should come clean immediately and set out exactly who the losers are."

Joanne Segars, chief executive of the National Association of Pension Funds, said: "The end of contracting out will become a key issue in both the private and public sectors as the Government moves towards a much-needed overhaul of our state pension.

"The transition will have to be handled very carefully to ensure a fair result for employers and savers."