The announcement that the DWP is to publish a green paper on reform of the basic state pension and tackle means testing may have come as a surprise.
In between the expected announcement on the Government’s reviews of state pension age, public sector pensions and auto-enrolment, the DWP this week confirmed that a green paper on reform of the basic state pension would also be published this year, provisionally looking at combining the basic state pension with the second, earnings related, state pension and set at £140 above the current level of means-tested benefits. The new pension is planned to be introduced for all new pensioners.
Simplifying the basic state pension has long been an ambition of pensions minister Steve Webb.
A citizens’ pension for all qualifying pensioners became official LibDem policy in 2005 and Webb has remained convinced that using a simple, adequate basic state pension is the most effective way of promoting private pension saving by providing clarity on the level of retirement income provided by the state and then allowing people the decide if they want to make further provision and also eliminating the disincentive to save that means-testing causes.
Both before the election and since his elevation to pensions minister, Webb has maintained that tackling the basic state pension is not just a desirable goal but a necessity if any long-term pension reforms are to work.
The introduction of Nest has added urgency to the need to tackle means testing. In opposition, Webb made it very clear that without tackling means testing, Nest was not a good idea.
Writing in Money Marketing In April in the run-up to the election, Webb said: “Real concern remains about the impact of mass means testing of pensioners on incentives to save in Nest. The Government has tried to park this issue but it will not go away.
“The challenge of building confidence that it will pay to save in Nest is pervasive. It will have to be addressed before 2012 if the launch of personal accounts is not to be undermined by doubts – ill-informed or not – about whether it will be worthwhile saving.”
His answer then as now is that increasing the basic state pension and eliminating means testing is the way forward.
Webb said in April: “The simplest and cleanest way to resolve this problem is to end the mass means testing of pensioners. A citizen’s pension, set at the current level of the pension guarantee credit, would ensure no pensioner lived in poverty and all had a firm foundation on which to save. In light of current financial circumstances, this is a long way off but we believe it is the only answer to tackle the complexity and unfairness in the system and ensure it pays to save.”
The Government’s plans for state pension reform are still very vague but the green paper, to be published later this year, is expected to be in line with Webb’s stated principles for reform.
A DWP spokesman says: “Our aim will be a simple, decent state pension for future pensioners, which is easy to understand, efficient to deliver and affordable.”
Webb: Maintains that tackling the basic state pension is not just a desirable goal but a necessity if any long-term pension reforms are to work
The news that the Government is reviewing the basic state pension has been widely welcomed by the pension industry. The National Association of Pension Funds has proposed similar reform with its idea of a foundation pension. Chief executive Joanne Segars says: “The UK’s state pension is the worst in Europe and we really need a simpler, fairer and more generous system.
“A clearer, flat-rate pension would provide much needed certainty to savers and pensioners and would cut bureaucratic red tape.”
The Tax Incentivised Savings Association is equally enthusiastic about potential state pension reform.
Director of policy Malcolm Small says: “If people are clearer about what they will get from the state in retirement, they have the clearest possible incentive to save beyond that level if they want a better retirement that the state alone will provide. For low earners, the basic state pension will provide a better income replacement rate than it does today. This is, on the face of it, the best news in pensions I have seen in the last five years.”
But there are also warnings that the industry and the public should not get too excited about any reforms until further details are announced such as how it will be paid for and how the new system will mesh with the existing pensions system.
Webb himself has acknowledged that moving to a flat-rate state pension will cost money and TUC general secretary Brendan Barber suggests that judgement of any reforms needs to be reserved until more detail is published.
He says: “Some reports suggest that everyone gains and that the new system will cost less but unfortunately both cannot be true. The real test will be not just who gains but who loses.”