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John Greenwood: The haves and have nots of state pension reform


I am sure Steve Webb is uncomfortable with the fact that he will be better off to the tune of £43,000 or so on account of the policy he is shepherding through Parliament.

He is probably also dismayed at the thought that someone his age who has worked all their adult life but has not been lucky enough to be offered a generous final salary pension, and who has no private pension at all, will be £35,000 worse off. That, as they say, is politics.

I am talking about the figures from Hymans Robertson which show that the pension minister will be better off to the tune of £37 a week as a result of the introduction of the single-tier pension. That income would cost around £50,000 to buy through an annuity.

It will cost the minister an extra £6,720 in National Insurance contributions.

Prime minister David Cameron is also doubtless embarrassed at the thought of getting an extra £37 a week – he clearly does not need it – even if he will have to pay £480 extra NI for one more year than Webb to get his £50,000 pension uplift.

To be completely accurate, it is not publically known whether Webb was contracted out into the DB scheme on offer in his nine years at the Institute for Fiscal Studies, before joining public service. I have put the question, and he has refused to say.

Similarly, the Prime Minister has refused to confirm whether he was contracted out during his six and a half year stint at Carlton TV. Both men are refusing to reveal the extent to which they will benefit from a policy they are putting in place.

To be fair to them, Labour, who one would think would defend the poorest sectors of our society, has not formally opposed the carve-up either and I am not 100 per cent sure why.

Labour members of the Department for Work and Pensions select committee that I have spoken to talk of a lack of lobbying on the point at committee stage, where the focus was directed towards valid issues relating to specific groups of women who would lose out. But submissions from Aon Hewitt, Towers Watson and Unite did flag up the issue clearly. Given the number of Labour front-benchers who will be similarly advantaged you would think they would want to get on the front foot on this.

The Hymans figures spell out with great clarity the way the single-tier pension gives piles of cash to contracted out workers at the expense of those contracted in, who will in many, many scenarios lose a quarter of their state pension.

Many of those contracted in workers, who by definition will include those without any other pension than state, will be worse off when they retire as a result of the twin reforms of single-tier and auto-enrolment.

I interviewed Scottish Equitable’s Stewart Ritchie, the original pension guru, when he retired. He said the biggest future issue facing pensions would be the public/private divide. And so it has come to pass.

Pension apartheid is a sensitive phrase. But whatever your view on the terminology, these reforms will certainly increase the yawning gap between the pensions haves and have-nots in the coming decades.

Most people would accept the fairness of everyone losing state pension if it means we all pay less tax in the long run. What they would not accept, if they had not had the wool so completely pulled over their eyes by what must be one of the greatest PR exercises in parliamentary history, is that they are taking such savage cuts so that public sector workers can not only keep their benefits protected but actually get more. Or, for that matter, so that colleagues who contracted out into a personal pension can get the same state pension as them and keep their contracted-out pot, and take a quarter of it as tax-free cash.

What I do keep hearing is that Treasury chief secretary Danny Alexander’s 2011 pledge to public sector workers of a deal that would last for 25 years will soak up most of the cash saved. Steve Webb cannot be blamed for that.

John Greenwood is editor of Corporate Adviser


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. While we are at it lets bring in the regulator FSA now FCA. Many years ago it was clear that the state could not afford SERPS nor the revamped S2P. As they offered contracting out advisers advised clients to take the money. The regulator stepped in to say it was bad advice to take the contracting out money.

    The regulator having forced bad advice on to the industry washed its hand of responsibility for that, it said who could have for seen a time when the state could not afford the second tier ignoring all the research to that effect in an ageing population. At the same time it wanted clarity of charges, it didn’t like that the old system was socially inclusive and the wealthy cross subsidised the poor so they could get commissioned advise as well. Cutting of the availability of advice for the non wealthy.

    It seems Labour, Conservative, Lib Dems and the regulator speak about social inclusion when it comes to taxes and their final salary pensions but not when it comes to those paying the bills.

  2. It is obvious to me that the people who make up the rules are making sure that they will not loose out when the single-tier pension starts also or if they do will only be effected by changes slightly . It really surprised me when I saw the way they were treating contracted out benefits under single tier, For some reason they have allowed people who have contracted out benefit (GMP) to build it up again in other words having a second dip into the pot. They and their employer have also been allowed NI rebates of 1.4% and 3.4% respectively for the last few years which a person in state second pension did not receive. Under the current arrangements the contracted out pension is deducted from the state second pension.

    The people who will benefit from this most will be people who are still in a final salary scheme that are contracted out and as it happens there are about six million people of which almost three quarters are public service scheme members.

    Under the single -tier pension they should only have been allowed to build up any single tier is if their foundation amount which could be made up of basic state pension, additional pension and GMP came to less than the foundation amount of pension of say £144 pw at 6 April 2016.

    For a person who had never been contracted out they would have it worked out in the same way but would have only had State basic pension and Additional pension and would only be able to build it up if at the date of single-tier pension on 6 April 2016 it comes to less than £144.

    Doing it this way everyone would be treated exactly the same. What the Government are doing must be breaking a persons human right to be treated fairly if they had never been contracted out.

    I wonder if the Treasury has worked out the cost of allowing people who have been contracted out to
    receive a pension twice.

    One other thing that people don’t realize is that for people retiring after 5 April 2016 they will no longer receive cost of living increases on their GMPs where it is paid with their additional pension when they reach state pension age. The potential loss is up to about about £23,000 for a woman and £17,000 for a man. There is a good article about this in the Independent dated 11 January 2014 by a Neasa McAerlean.

    Again people who are in public service won’t loose out because there are special arrangements in force for the DWP to contact the public service occupational scheme to take over the payment. This is not done for non public service schemes.

  3. Kenneth Thompson, You said :
    Doing it this way everyone would be treated exactly the same. What the Government are doing must be breaking a persons human right to be treated fairly if they had never been contracted out.

    I wonder if the Treasury has worked out the cost of allowing people who have been contracted out to
    receive a pension twice.

    Now I don’t profess to know of pensions in detail and your comment made me ask you to put this question to the DWP through the “Freedom of Information” .

    My interest in pensions is the discriminative policy condoned by the government in freezing the indexing of some pensioners dependent on their place of retirement, ie. No Indexing in Canada but indexed in the USA. Indexed in the US Virgin Islands but frozen in the British Virgin Islands, indexed on Israel but not in Indonesia.. You get the picture and possibly know all about it.
    This situation is caused by a purely domestic regulation which currently affects pensioners and has been copied into the new Pensions Bill in clause 20. Any pension provider would not be allowed to do this but government make the rules and abuse the system without justification but hide behind false statements and past policy. Their main so called reason is the economy but ignore the National Insurance surplus which although is borrowed by the government should be used for it’s prime purpose before any borrowing takes place.
    David Cameron has just said that we are a wealthy country ! To which I reply, Yes, but partly on the backs of the frozen pensioners with some getting less than 10 pounds a week.

  4. Hi George,

    I do understand your problems about not having pensions increased when you live in special countries. Again people in public service contracted out schemes that were contracted out of state additional pensions prior to April 1997 have special rules issued by the Treasury in 2001. These rules state that if their is any reason why DWP/HMRC can’t pay increases on GMPs where it is their responsibility to pay them they write to the occupational pension scheme telling them that they have to take over the payment of GMP increases.

    If you enter ” MOCOP Treasury 2001″ it should bring up the 50 page booklet about public service schemes taking over payment of increases on GMPs.

    I am in contact with Steve Webb the pensions minister through my MP regarding the non payment of GMP increases normally paid by the DWP for people reaching state pension after the Single-Tier pension starts on 6 April 2016. Both he and the DWP deny that the DWP are responsible for paying any of the GMP increases for anyone at all. I can’t understand this as every pension scheme booklet in the land says they do as well as their own publications and publications by other Government Departments.

    I am als in contact with the Treasury about this who know what he is saying is not correct so they are in the process of drawing up special instructions for public service schemes to take over GMP increases that Steve Webb says do not exist.

    I do have several freedom of information request done through a web site called ” What Do You Think They Know” which are all available on the web.

    Tell me if you can find the entries, the link words might be loss of GMP increases and the name of the web site. They are under the name C.Thompson.

  5. Hello Kenneth,
    Thankyou for your informative reply to me. Very interesting.
    That is much appreciated and I will have a look at those references you gave.
    Cheers, George.

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