The British government has announced plans to only slightly increase the rebate paid to those who opt out of the public sector scheme, drawing criticism from the private pensions industry.

According to the Daily Telegraph newspaper, the Department for Work and Pensions has revealed that from 2007 the rebate paid to those in defined benefit schemes contracted out of the State Second Pension (S2P) would only rise from 5.1% to 5.3%.

The Association of British Insurers’ director of life and pensions Chris Kenny described the government decision as ‘disappointing’ and he accused officials of ignoring the ABI’s advice on the subject.

Mr Kenny said: We are very disappointed that the government has chosen to ignore our detailed arguments on the level of rebates. An opportunity has been missed – at least in the short-term – to simplify the decision-making process for individuals and help government to spread the cost of future pensions liabilities.

A simplified contracting-out system with attractive rebate levels to stimulate saving should be a crucial part of the new pensions settlement. We hope to see this in the White Paper and welcome the government’s acknowledgement that a further review of the rebate may be necessary at that stage.

Experts believe the increase, as it stands, will not be sufficient to benefit companies, raising concerns that more final salary company pension schemes could go.