The proposed new single state pension is a good thing. Virtually all the pensions people that I know are in favour of it, because it makes it clear to savers exactly what the Government will provide. The current complex three-tier system that pretends to offer security is unsustainable.
So, hats off to the Government for tackling this difficult subject.
Where we now need to be careful is in how we implement it, particularly the transition from old system to new system. Yes, there will inevitably be losers – people who would have done better under the old system and, winners – those people who are better off under the new system.
But there must be broad fairness otherwise we could derail this vital reform.
The paper accompanying the draft Bill outlines some fictitious examples of how it works. They are called Liz, Matt, Jenny and Tim. Let me introduce you to another example not in the paper. I’ll call him John.
John has worked in the insurance industry for 29 years and has been lucky enough to have been in a contracted-out DB scheme for 28 of those years. By the time the new state pension comes along, in say 2017, John will have been working for 33 years of which 28 were contracted out.
John will be awarded a foundation amount which is calculated as follows: (33/35 x 144) minus a “rebate derived amount”. It isn’t currently known how the rebate derived amount is calculated but we do know that an extra year of national insurance under the new pension is worth £4.11 per week so I’ll guess that the deduction is the same.
So, John’s foundation is £135.77 minus £115.08 (i.e. 28 x £4.11) = £20.69.
To make sure John isn’t worse off under the new system there is also a safety net of his position under the old system. As John had 30 years NI credits at the date of the change, his old pension is £107.45 (the current basic state pension). So this becomes John’s foundation amount.
As John has also been contracted out for 28 years, he also has SERPS/S2P equivalent embedded in his DB benefits, worth say £100 a week.
No real unfairness in John being protected at this level as far as I can see.
Where the problem arises is in the new system. John is then allowed to build up another £37 of state pension at a rate of £4.11 for every extra year of NI credit after 2017. It will take John nine years to build that.
As John is still in his early 50s in 2017, he has plenty time to do that.
Compare that to the luckless Liz and Jenny from the consultation paper that have never been contracted out. They get £144 and £147 respectively and are not allowed to build up any more state pension. They don’t have any contracted-out equivalent to add to these totals.
John gets £144 from the new system plus £100 state pension equivalent from the old system that is embedded in his DB pension.
Comparing John with Liz and Jenny, the transition looks more than a tad unfair in John’s favour.
Sorting this out should not be too difficult, and the consultation and Bill have a way to go before they become final. We should use that time to iron out as much unfairness as we can.
Aviva corporate benefits head of policy John Lawson