From the TUC

State pension changes – more questions than answers

24 Mar 2011, by Guest in Pensions & Investment

The Budget promises us that there will “shortly” be a green paper on a “simple, contributory, flat-rate” state pension that is above the level of the means-tested Guarantee Credit. The appearance of the green paper has been rumoured for some months but this the first confirmed sighting, with the Chancellor suggesting that such a pension would be around £140 per week. We obviously need to wait for the green paper to see what is being proposed but the statement in the Budget Report that any changes would be “designed so as not to increase public spending dedicated to state pensions” means that we should not get our hopes up high. In particular, it is clear that the proposed changes will only apply to future retirees, which means it will do nothing for the millions of current pensioners who are already in poverty. And the only reason why even this limited measure will work is that the majority of new pensioners already get at least £140 per week from their state pension, simply because most have build up a second earnings-related pension since 1978 on top of the basic pension. In other words, the Government’s plans are only feasible because of the changes to state pensions that Barbara Castle and the Labour government introduced more than 30 years ago.

The government says that when in introduces the flat-rate pension it will also honour contributions to the current system. This should mean that when retirees have accrued rights to an earnings related state pension that, when added to the basic pension, is more than the flat-rate, they will continue to get the higher amount. But this poses a problem if the government sticks to the aim of no increase in public spending on state pensions, as some resources will be needed to pay the higher pension to those that have accrued less than the flat-rate amount. Put simply, it means that you can’t have any gainers without any losers, with the clear implication that the government expect the money to come from other pensioners.

An important consequence of moving to single tier provision, according to the Budget Report, is the end contracting-out for defined benefit pension schemes. However, the Government says that it will investigate the potential impact of this on employees and schemes in both the private and public sectors. This is crucially important, as abolishing contracting-out for defined benefit pension schemes would mean, all else being equal, increased contributions for both employers and employees that still have such arrangements. This is bound to lead those employers who are affected to seek to renegotiate their schemes, with all the momentum leading to fundamental rather than minimum change. Experience suggests that this is bound to mean that members will end up being worse off. The future for defined benefit schemes is already bleak enough without the abolition of contracting-out for such schemes adding to their problems.

One notable point in the section on the green paper is the statement that the new flat-rate pension would still be “contributory”, i.e. entitlement will depend on the payment of contributions while at work. What this means is that the government has already ruled out, even in advance of the consultation, the idea of a “citizenship pension”, i.e. one that is paid to everyone, regardless of the contributions they have paid. Consequently, some system of state pension contributions will have to be maintained. This is despite the parallel announcement in the Budget that the government will also be consulting this year on integrating the “operation of income tax and National Insurance Contributions (NICs). The way this proposal is worded suggests that the government has rejected the idea of consolidating the two deductions into a single tax on incomes. It’s only the “operation” of the two deductions that is being integrated, rather than aiming at having a single tax. My assumption is that the Treasury has worked out that the distinction between the two types of deduction needs to be maintained, with NICs surviving in some form, so that it can maintain the contributory principle for the state pension. It will also make it easier to avoid the political suicide that would be involved for the government if the single deduction were extended to earnings above State Pension Age or to other forms of income, such as pensions, savings and dividends.

Finally but not least as far as state pensions are concerned, the government has said it will bring forward proposals to manage future changes in the State Pension Age more automatically, including the option of a regular independent review of longevity changes. Few details are given of what the government has in mind on this but it is possible that it is deluding itself about what might be possible to achieve. The problem is that people have to plan for their retirement and, as part of that, they should have a right to know reasonably far in advance when they will receive their state pension. So this means the independent review would need to know not what longevity is now, but what it will be many years in the future. And this is not just unknown, it is unknowable.

So what we have on state pensions are a green paper on a flat-rate pension for new retirees; an investigation of what that means for contracted-out defined benefit schemes; a consultation on integrating the operation of income tax and NICs; and proposals for a mechanism to decide on further increases in State Pension Age. Lots of questions but no real answers

GUEST POST: Bryn Davies is the Director of Union Pension Services Ltd, a unique independent consultancy on occupational pension schemes, primarily for trade unions. Most trade unions have used his services at some stage since UPS was established in 1989 and a number retain his services on a regular basis. Other clients have included the Equal Opportunities Commission, the National Audit Commission and in Central Europe for the PHARE programme. He has been a Fellow of the Institute of Actuaries since 1974.

One Response to State pension changes – more questions than answers

  1. Joan Yarker
    Mar 25th 2011, 5:08 pm

    A two tier pension then. Existing pensioners like me, who stayed at home for 14 years to bring up my three children, divorced and remarried do not get the full pension rate because we were not at work paying NI contributions for long enough and cannot claim on ex-husbands or present husband stamps either. No pension credit because when I was working as a teacher I did save so as not to be a burden later on for my children. We are all in this together I don’t think so!!!