Pension reform will not lead to tax rise The Treasury has promised not to use the introduction of a more generous single-tier pension as a stealth tax increase. The small print of the coalition plan to introduce a flat-rate £144 a week pension - announced on Monday - indicated the exchequer would claw back significant sums from higher national insurance contributions (NICs). But aides to George Osborne said the intention of the plan was not to improve the public finances. "We won't use it for net revenue raising," an aide told the Financial Times, indicating that his estimate of £6bn additional NICs a year would be spent on lowering other taxes or raising public spending when the new pension comes in some time from 2017. Parts of the public sector, particularly local authorities, will be significantly worse off if the Treasury does not compensate them for higher employer NICs from the reforms. The plan gives an initial windfall to the exchequer, the Treasury accepts, because the changes to the state pension are revenue neutral - with gainers and losers balanced - but much higher NICs. This happens because once the state second pension is abolished, there is no rationale for continued "contracted out" rebates of national insurance for those forgoing the right to that benefit. This means NICs will rise for "contracted-out" employees and employers. Contracting out represented an agreement to waive earnings-related elements of the state pension for those putting money into good private schemes and reaping lower NICs. However, as the pension becomes a flat rate for everyone, there are no longer any earnings-related parts to waive, so employers and employees previously contracted out will have to pay more. Abolishing the employer rebate will see employers pay 3.4 percentage points higher NICs on their staff salaries between £5,564 and £40,040. Private sector employers will be given the right to reduce the generosity of their defined benefit schemes to offset their additional employment costs. However, this option is not available to public sector employers without reopening the recent agreements to limit pensions following proposals from Lord Hutton, the former Labour minister. Contracted-out employees will also pay higher NICs after the reforms, the equivalent of a rise in income tax of 1.4 per cent of their earnings also between £5,564 and £40,040. Many will pay higher NICs and receive less generous private defined-benefit pensions, although they will receive higher state pensions than they had expected. With 5.3m public sector employees in active defined-benefit pensions, much of the exchequer windfall will come from big employers in local authorities and the health department. The Treasury declined to commit to compensate public sector employers for their additional costs, saying this was a matter for a future spending review. As the Treasury had not set a date for the policy to be introduced, the Office for Budget Responsibility would not show the increased NICs as a windfall to the public finances in 2017-18, the aide said.