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Citizens advice

A pension debate has been triggered by two recent rep-orts and the resolution of that debate could have a major impact on the way we get people off means testing.

The NAPF has published an interim report in its quest to demonstrate that the UK could afford and practically achieve a transition from the current maze of state pensions to a simple citizens pension which would greatly reduce the need for means-testing in old age and would be fairer to women.

The current system is less generous to women because it gives less state pension for interrupted work records (although it will give better credits for women) and less state pension for low earnings.

I am a member of the steering group overseeing the NAPF project. The det-ailed work has been commissioned by the NAPF from the Pensions Policy Institute. To recap, a citizens pension is a state pension which is flat rate and is granted on the basis of a residency test, as opposed to a National Insurance contribution record.

The NAPF project assumes that it would be set at or above £105 a week in today’s money because that is the level of the guarantee credit.

The key advantages of such a citizens pension are that it is simple, it is almost universal and it eliminates the need for a lot of the current and future means-testing in old age.

There would still be significant elements of means-testing with a citizens pension at £105 a week, notably housing benefit and council tax benefit. The NAPF report demonstrates that a citizens pension could practically be brought in as early as 2010. There is just one small catch – the NAPF proposition assumes the abolition of the state second pension and therefore of contracting-out rebates.

For me, one of the key questions is whether the citizens pension’s simplicity and reduction in means-testing would lead to an increase in fun-ded private pensions which would at least offset the loss of the rebates. Frankly I do not know the answer to this and I do not think anybody else does either.

A few days before the NAPF interim report, the ABI published a report on re-invigorating contracting out. Both the NAPF and ABI recognise that contracting out is complex and not very good value. But whereas the NAPF would abolish it, the ABI goes back to first principles and argues that the original reasons for having contracting out remain valid today.

It could, argues the ABI, become once again the seed corn from which funded private pension provision could be made to grow. If state second pension was beefed up, that would prospectively reduce means-testing and create higher rebates.

Those rebates could be slanted to encourage higher earners to contract out, leaving the lowest earners in the state scheme. The rebates could be conditional on additional contributions or a two-tier system of rebates could be paid, the higher tier requiring a particular level of additional contributions.

The ideas of the ABI and the NAPF contrast on a number of levels – funded private for contracting out• unfunded state, deferred consumption•immediate consumption, incentives built round contracting out•letting people draw their own conclusions and inc-entives to be defined, contributory•residence.

There is one way in which the ABI and the NAPF ideas could co-exist, namely the replacement of the basic state pension by citizens pension at the level of about £79 a week but retaining a second-tier state pension which could be contracted out of. Some people might argue that this would be best of all worlds, others that it is the worst of all worlds.

During the first half of this year, this debate will play out in front of an audience of politicians and voters but perhaps three of the key observers will be the Pensions Commission comprising Adair Turner, Jeannie Drake and John Hills. Their policy recommendations in the autumn will be extremely influential, especially if Labour wins the general election.


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