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A circle unsquared

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The government may be painting itself in something of a corner with its attempts to change multiple parts of the pension system all at the same time. John Greenwood reports

Increasing state pension age and making it flat-rate, overseeing implementation of auto-enrolment and reforming public sector pensions all at the same time is a big ask, and squaring all the circles at the same time is proving near impossible. The Coalition government has not flinched in asking the difficult questions - the answers are proving harder to deliver.

The debate over the rapid increase in state pension age faced by women born in the mid 1950s highlights the scale of the challenge in trying to fix the system. Laws are meant to treat everyone equally, but because everyone is coming from an unequal starting point, apply the same treatment across the board and some people can be hit very badly.

Such is the position of the 300,000 women who face an increase in state pension age of more than 1.5 years, 33,000 of whom are seeing a two year increase in pension age with just six years’ notice. That compares to a minimum seven years’ notice of a one-year increase faced by men.

DWP secretary of state Iain Duncan Smith has indicated that transitional help will be given to this group, but has resisted unraveling the overarching principle of an accelerated increase in state pension age. How this transitional help will be given remains unclear.

Dr Ros Altmann, director general of Saga, says: “One possibility could be a compromise that I suggested some months ago which would allow those affected to still claim pension credit on the old state pension age timetable.

“This would mean, for example, that a woman born in April 1954 who would not be eligible for state pension until she reached age 66 under the Pensions Bill changes, could still be allowed to claim means tested pension credit at age 64 if she had little other income. This would ensure that the poorest women did not lose out completely by having to wait longer for their state pension. It could also help the poorest men who would have to be permitted to claim pension credit at the same age as women.

The Coalition government has not flinched in asking the difficult questions - the answers are proving harder to deliver

“This amendment would cost about an extra £300 million but would potentially alleviate the worst hardship. Many of those affected, however, are unlikely to be happy to be thrown onto means tested benefits.”

Such a move would address the real needs of those women affected, but would also punch a hole in the hoped for simplicity that the flat rate state pension is meant to introduce. With auto-enrolment demanding simple messages based on less means testing, not more, it is not surprising ministers have been loath to grant concessions, however deserving the cause.

But the interconnected complexities go much further. While a flat rate state pension is seen as an imperative component to implementation of auto-enrolment, suspicions are beginning to grow that it will never see the light of day because of the abolition of contracting out for public sector schemes.

The CBI has asked for a statutory override for private sector schemes as a condition of agreement to the government’s plan B flat rate pension. That would see employers given statutory muscle in readjusting defined benefit promises, so that employees’ occupational pensions were reduced in line with the increase in state pension they would get. If that could be worked out on a cost-neutral basis, all well and good.

But John Lawson, head of pensions policy at Standard Life, believes it is the settlement that is made with public sector workers that really matters. If public sector schemes are to lose their NI rebate, then surely dealing with that should form part of the settlement being argued over with unions right now. But it is not.

“If you don’t attempt to address the NI rebate issue now then you aren’t going to be able to revisit it later,” says Lawson. He argues that, after hammering out an agreement on raising retirement age, increasing career average, reducing benefits and increasing contributions, it will be unacceptable to go back to public sector workers a year later to reopen everything with the abolition of contracting out.

“Doing it all at the same time could silence many of the unions’ arguments, because of the redistributive nature of what is being proposed,” says Lawson. “If you say low paid hospital porters are going to have to pay more for their small DB scheme, but they are going to get a £7,000 state pension as well, that would be a good message.”

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