Budget 2011: Final blow to DB schemes as contracting-out abolished

Contracting-out for defined benefit (DB) pension schemes will be scrapped as part of the move to a single tier state pension.

George Osborne announced the government would look to reform the state pension for future pensioners so it provides simple, contributory, flat-rate support above the level of the means-tested Guarantee Credit.

The Budget report says the DWP will publish a Green Paper to consult on options for reform shortly, including a proposal for a single tier pension, currently estimated to be worth around £140 a week.

However, it says the proposals would end contracting-out for DB schemes. Pensions experts had predicted such as move would kill the financial incentive companies have to keep the schemes open, thereby spelling an end to final salary arrangements.

The Budget Report says: "Moving to single tier provision would end contracting- out for defined benefit pension schemes."

The report says such a move could bring "significant" simplification of the personal tax system but the government would investigate the effect of such a move on both schemes and employees.

It says: "The government will investigate the potential impact on employees and schemes in both the private and public sectors. The government will honour contributions to the current system.

"Given longer-term pressures on the public finances, these reforms will be designed so as not to increase public spending dedicated to state pensions."

It adds: "Final proposals are subject to confirmation, including on affordability, and will reflect the projections set out in the Office for Budget Responsibility's forthcoming Fiscal Sustainability Report."

In its review of tax reliefs, published on 3 March, the Office of Tax Simplification recommended contracted-out rebates should be abolished for DB schemes from 2012 to align the treatment of all schemes. It estimated the total tax savings from such a move would be around £9.1bn

Schemes currently benefit from a rebate of 3.7% of total DB scheme member payroll. The abolition of contracting-out rebates for DC schemes has already been announced and will take effect from 2012.