The single tier pension is meant to be good for auto-enrolment. In fact, it is meant to be essential if the government is not to be sued for misselling.
Yet the way the DWP’s flat rate pension White Paper addresses the problem creates more problems for the auto-enrolment target market than it solves. Few would attack the Government for bringing the income of millions of women, self-employed and those with poor contribution records up to the level of a decent pension.
But where the plan falls down is the over-generous approach to solving the contracting out conundrum, which buys the support of defined benefit members, mainly in public sector unions, at the expense of the great unpensioned.
That those who have contracted out do better is irrefutable. If you have contracted out and still have 10 years to retirement when the single tier pension comes in, you can get the same pension as someone who stayed in, and still get to keep your contracted out pot which can be worth anything up to £100,000.
Those in defined benefit schemes can also benefit, building up an extra couple of grand of state pension for extra NI contributions as low as £250.
But the pension reforms are supposed to be about helping those without pensions.
The auto-enrolment target market, by contrast, is full of people who have never contracted out. We all expected the abolition of S2P to hit contracted-in high earners. Yet it turns out low earners who stay contracted into the state scheme lose out under the changes.
You would not know this by looking at the White Paper, however, as nowhere does it say what different income groups could expect from S2P after 30 or 40 years in the system.
It gives the impression the Government is relying on the very complexity of state pension provision to push through changes without the public knowing. Figures the DWP gave me a couple of years ago stated a low earner, on £14,200, reaching state pension age in 2025 could expect state second pension of £2,444, rising to £2,860 in 2035. Add basic state pension and that would give an income of £500 a year more than the flat rate pension in 2025, which they will now lose.
Medium-earners on £25,800 are nearer £2,000 a year worse off. The impact assessment points out auto-enrolment will help those who lose out on the abolition of state second pension. But even if low and medium earners are automatically enrolled into an 8 per cent combined scheme today – then by 2035 their auto-enrolment income will have only just offset the state pension they will have lost, leaving them £125 and £595 a year off respectively.
Is this really what the DWP intended? Because the great unpensioned do not have a union, they are being cut out of this massive state pension carve up. If this state pension reform passes unamended, auto-enrolment will have made many of the low paid worse off.
John Greenwood is editor of Corporate Adviser