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Public sector pensions: £6.6bn a year wasted on 'illogical' subsidy

The government loses £6.6 billion a year allowing public sector workers to pay less national insurance (NI) than private sector employees, says independent pensions consultant Ros Altmann.

Public sector pensions: £6.6bn a year wasted on 'illogical' subsidy

The government loses £6.6 billion a year allowing public sector workers to pay less national insurance (NI) than private sector employees, says independent pensions consultant Ros Altmann.

The Treasury could save £6.6 billion a year by ending the contracting-out of public sector pensions, independent pensions consultant Ros Altmann has told the Public Service Pension Commission.

In a response sent to John Hutton as part of the government consultation of public sector pension schemes,  Altmann said members of unfunded pensions are paying lower national insurance contributions (NICs) than they should under the contracting-out rules.

Contracting out rules allow individuals to pay a lower rate of NI and use the money they would have paid to contribute to a private pension. In return they do not receive the second state pension (S2P), which is a top up to the main state pension, when they retire.

However, Altmann has highlighted the fact that public sector employees can contract out and still receive S2P. This is in contrast to private sector workers who can not.

‘Public sector workers are not paying the appropriate rate of national insurance,' she said. 'They pay less than they should - paying only 9.4% instead of the full 11% rate, while public sector employers have been allowed to pay just 9.1% national insurance, instead of the full 12.8%.'

The pensions campaigner said ending the rules would instantly benefit Treasury coffers, bringing in £2 billion a year from public sector workers and £4.6 billion from public sector employers.

‘It is an unfair, illogical subsidy to public sector workers which costs taxpayers billions of pounds each year,' she said. 'Ending contracting out would be an obvious way to both increase revenue immediately, improve public finances in the short term and reduce the cost of public service pensions in future,’ she said.

Join our reader debate on public sector pensions here

18 comments so far. Why not have your say?

Alexander Middlemas

Aug 03, 2010 at 12:00

How can such enormous differences in the employment of public and private sector employees have ever been allowed?

Worse, private sector employees are actually paying twice for this by not having the same benefit AND paying the tax to allow it to happen. Unbelievable, and one assumes it won't be allowed to continue.

Come on coalition, lets see some more digging like this and see what other nonsense can be exposed.

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Aug 03, 2010 at 13:29

Well hopefully there will be another govenment reform to stop this.

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Redundant (Old Timer?)

Aug 03, 2010 at 13:36

This has been around under ALL previous Governements since at least the mid 70's. So lets stop it now.

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Ian Grumpy

Aug 03, 2010 at 13:42

How? Two words - Trade Unions!

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Brian Pearson

Aug 03, 2010 at 13:42

Why should I be supprised at this news. Another, what might be called "public sector perk" probably aimed at the making the ministers pension pots even more inflated. For gods sake! clean up this situation then name and shame the ministers who let this occur on their watch. Surely, the previous chancellor knew this was going on?????

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Aug 03, 2010 at 13:55

Why change it now when it has been around for many years? This would be to change the terms of conditions for public sector workers part way through their employment. That seems a bit unfair.

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Aug 03, 2010 at 13:59

Hang on!

Who are the "public sector employers" that would make the 4.6 billion annual payment. Why - that's the public purse so it's us that would pay it one way or another. The article is a crock of rubbish.

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Charles Roberts

Aug 03, 2010 at 14:08

Of course it should be stopped immediately. Foggiest is wrong to say that the public sector employers would just pass the extra cost on to the tax paying public.

Don't forget that many local government costs are recouped by user charges; these will go up to reflect the real cost of employeeing the public employees.

Also the biggest scandal is that the direct works departments of local governments are allowed to compete against private contractors and this concession distorts their costs, leading to less work being contracted out!

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alan thomas

Aug 03, 2010 at 14:21

I am not a local gov. worker but what I have seen in our small town is private contractors have done poor work then the council workers have to put thig rigth.

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Anonymous 1 needed this 'off the record'

Aug 03, 2010 at 16:36

Will The Treasury Then be able to afford the larger unfunded extra state pensions that it will then eventually pay out?

Methinks that it is better for the money to go into a funded pension as happens with Local Authority pensions at the moment.

I sometimes wonder if the motivation of Ros Altman and others of her ilk is really that they are resentful of the fact that Local Government Pension Schemes manage to keep winning awards for the best run pension funds. Could we be seeing plain simple jealousy?

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Aug 03, 2010 at 18:52

Of course it's ridiculous. A private sector company would never run its affairs this way and would probably be accused of discrimination if it did. By definition the public sector is of course living off the wealth creation of the private sector so the key is to deliver those essential services at the lowest possible cost. This leaves the maximum net funds to be invested back into businesses that create real jobs. It's a virtuous circle, but do you expect the dinosaurs leading the public sector unions to understand this? You are joking.

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David Hunt

Aug 03, 2010 at 22:03

"Altmann has highlighted the fact that public sector employees can contract out and still receive S2P"

How can they do this?

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Nigel Snowden

Aug 04, 2010 at 08:06

public sector. civil servants,all the Goverment are what they are, paid by the public !!,they should not and must not have any better benefits / perks then then the private sector.

Its they sleazy Unions and Idiot Goverment officals that have allowed this to happen, If they were running a proper commercial business they all would be bankrupt now.

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michael Bartlett

Aug 04, 2010 at 11:04

There is not a problem as this is my real name.

That is if this is addressed to me rather than another Michael Bartlett.

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Anonymous 2 needed this 'off the record'

Aug 04, 2010 at 12:33

Ros Altman has been the voice of reason and sensibility for many years in the Pensiosn arena and past governments have chosen to ignore her many sensible suggestions because they are not vote winners, there must be some way of detangling pensions from politics maybe then some sensible long term planning could take place.

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Kevin Sowerby

Aug 04, 2010 at 12:50

Its news to me ( to quote from the article " the fact that public sector employees can contract out and still receive S2P. This is in contrast to private sector workers who can not"

How can publice sector employees contract out and still receive s2P?

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Anonymous 3 needed this 'off the record'

Aug 04, 2010 at 14:54

Contract out and still receive S2P?....Surely this article is misleading and a scurrilous piece of stirring? (and how it seems to have worked)

I'm in receipt of a public sector pension (some of it from HM Forces, before I get pilloried). I was contracted out, do not receive S2P and never expected to.

As for Brian Pearson's 'perks', well some of the perks I enjoyed were having restrictions placed on where I could live, being uprooted every few years, not being allowed to have a second job and not being allowed to visit certain countries even after leaving the forces.

I've seen some mighty impressive bonuses, share option acquisitions, company cars etc of friends in the private sector but I'm not bitter. It was all a case of options taken many years ago.

All this venom being directed towards people just because they happened chose a public service career at the outset is quite frankly inexcusable.

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Oct 10, 2010 at 20:40

can someone answer this: how much has the Govt received in payments from public sector workrer and employers during 2009/2010, and how much has it paid out in pension payments?

Why doesn't he Govt invest pension payments recieved? The British Transport Police ( BTP) is a public sector body but unusualloy has a private pension. This pays out the same amount as the Home Office public sector schemebut does take slightly higher payments from employees( 16%).This fund is healthy with nearly £700m surplus, if they can do it why not the Govt?

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