Could Rachel Reeves really be so brazen as to lumber private sector employers with having to pay national insurance contributions (NICs) on their employees’ pension contributions – but to spare public sector employers the same burden? That is what is being reported this morning. It has been suggested that, in next week’s Budget, the Chancellor will announce the end of an exemption for private sector employers, which currently ensures employers don’t pay NICs on pension contributions. At the same time, Reeves is proposing to instantly compensate public sector bodies so they are effectively spared from have to bear the burden.
This would be crass for two reasons. Firstly it would be a clear breach of Labour’s manifesto promise not to raise NICs (as well as income tax and VAT). Secondly, it would drive an even deeper wedge between public sector pensioners and private sector ones. If you are lucky enough to have a private sector pension, you have been able to shrug off poor investment returns in recent years. FTSE not doing well, bond markets crashing? Who cares when you have an index-linked pension that is underwritten by taxpayers?
Households would then be paying over £500 a year to help public sector employees to retire in style.
Public sector workers may think they are paying for their pensions through a lifetime’s worth of contributions – but they are not. Unfunded public sector pensions are already imposing a growing burden on taxpayers. According to the Office for Budget Responsibility, these schemes paid out £53.1bn of benefits in 2023/24 but took in only £45.3bn in contributions – leaving taxpayers to stump up a net £7.9bn. This works out at an average of £276 per household. By 2025/26, the OBR estimates, the deficit will have grown to £9.9bn. And that is before taking into account the cost of compensating public sector employers to cover the cost of NICs on pension contributions. This would add an extra £5bn to the effective subsidy of public sector pensions. Households would then be paying over £500 a year to help public sector employees to retire in style.
Labour governments have always tended to favour public sector workers: they are its main voter client base after all. But Reeves does seem to be taking it to extremes – announcing fat pay rises for the public sector while simultaneously complaining about a £22bn ‘black hole’ in public finances and lumbering the rest of us with tax rises to help fill it.
There is a reason why Labour increasingly seems to serve the public sector. Back in the 1970s, a substantial proportion of trade union members worked in the private sector: it was Ford workers, for example, who sparked the Winter of Discontent by refusing to accept pay restraints urged on them by the Callaghan government. But trade unions are much weaker in the private sector now. Instead, the real powerful unions are those which serve white collar workers in the public sector, such as doctors and civil servants. The exception is rail unions who represent train drivers and on-train staff working for train operating companies which are notionally – but not for much longer – in the private sector. But then the rail industry has never operated in quite the same way as the genuine private sector – it has remained heavily state-subsidised. Moreover, train companies like LNER have already started to creep back into public hands.
As a result of the evolution of trade union membership, when a Labour government listens to unions it is increasingly listening only to the representatives of public sector workers. That is not going to help the unfairness created by the growing gap between public and private sector pensions.
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