Pensions… good news at last

Iain Duncan Smith is expected to signal a radical improvement in state pensions. We have been calling for this for years. Dr Ros Altmann, Director General, Saga.

Before the General Election, Saga conducted a nationwide poll of the over 50s and drew up a list of the top six policy changes that older citizens want. This Saga Manifesto called for a flat-rate state pension without means testing. It could be that we are one step closer to achieving that now. After years of watching our pension system falling apart, it seems that Iain Duncan Smith may finally be getting to grips with the inadequacies of the UK state pension. In a speech today, he will signal radical reform of our state pension – the kind of reform that should have happened years ago.  A pension revolution may be about to occur.

For years, Government has tinkered with our current inadequate state pension system, each time adding to its complexity and still mass means-testing UK pensioners. The UK has just about the most complex state pension in the world. Most people have no idea what state pension they will be entitled to and, in fact, officials have recently admitted that they are struggling to cope with it too!  Even a few months before retirement, officials are often unable to actually tell future pensioners what they will get by way of state pension.

This is because anyone retiring can receive many different elements of State Pension. There is a Basic State Pension, a Second State Pension, plus some State Earnings Related Pension – or SERPS – plus the Graduated Pension. All of these have different qualification criteria and come from contributions made in different years. And if all these are not enough, pensioners can claim a complex, means-tested Pension Credit or around £132 per week, which consists of a Guarantee Credit and a Savings Credit. What a mess!

While advising the last Government from 2000 – 2005, I kept highlighting the complexities of our pension system, also warning of the dangers and disincentives entailed in mass means-testing. I advised introducing a universal flat-rate pension. But this was ignored. In 2005, the Turner Commission again failed to grasp the opportunity for such radical reform. So many missed opportunities.

There are two fundamental problems which may be addressed at last. Firstly, the current system discriminates against women – they receive far less state pension than men, because although they are credited into the National Insurance system when they are looking after children or relatives, or working part-time, they are not credited for the same amounts as men receive when working full time. Secondly, because of the reliance of mass means-testing, our State Pension system undermines private pension saving. Even on the Government’s own figures, one in 20 future pensioners could see no value from their private pensions, so they will have wasted their contributions. No wonder people are reluctant to save in a pension.

As we are about to launch a national system of auto-enrolment, and a new national pension scheme (called NEST) specifically targeted at low to moderate earners, we would be at risk of putting these workers into a pension which would ultimately be partly or totally removed from them by the means-test. It is particularly those low to moderate earners who are most likely to lose out and they will be unable to save enough to float themselves off means-testing. Therefore, in order to alleviate some of the problems of auto-enrolment and the official NEST pension system, it is really important that the Government sorts this out. At last, it seems as if they are intending to do just that.

What is likely to happen?
No details have been officially announced yet, but I suspect the idea is to introduce a flat rate State Pension, which combines the Basic and Second State Pensions into one payment of, say, £140 a week. This is above the Pension Credit level of just over £132 a week and well above the full Basic State Pension of  £97-65 a week. Everyone with a full National Insurance record would automatically get this higher pension, so most women would receive a much better state pension, without having to claim Pension Credit and without penalty to their private savings..  Presumably, anyone whose state pension would have been above that level will still get more, so the £140 will be a minimum, not a maximum.

Imagine it – one decent, flat-rate state pension that everyone could understand. This would be the best news for pensions in years!

What are the major advantages?
1: Simplicity
2: Better pension than the current system, especially for women
3: Makes NEST and auto-enrolment suitable
4: Nobody would need to be forced to buy an annuity
5: No more mass means testing of pensioners
6: A really decent pension in exchange for the later pension age

This change would provide better justification for a later state pension age. The increase in State Pension Age, announced in the Comprehensive Spending Review, was supposed to be ‘fair’ because it was in exchange for a decent state pension. However, the current proposals for slowly raising the Basic State Pension each year would not be sufficient to really pay a ‘decent’ pension, whereas radically reforming the system, as suggested in today’s papers, would be a far better deal, especially for women.

Extra revenue would also come from ending Contracting out
If there was a flat-rate state pension, the Government would be able to end the current practice of allowing people to ‘contract out’ of the state second pension. This could bring in an extra £8billion in National Insurance contributions each year (£5billion of which would come from public sector workers and employers). This extra revenue would also save money in the longer term, because public sector pension schemes would not have to pay the replacement State Second Pension from scheme pension age, it would just be paid from state pension age. This could be the best news for women’s pensions in our lifetime! Previous Governments have failed to get to grips properly with this problem, at last it seems we have politicians willing to bite the bullet and sort this out