There has been much criticism from all sides about the complicated arrangements for bringing in the new state pension from 6 April 2016.
Hardly anyone I have spoken to seems to fully understand why up to two-thirds of those with a full National Insurance record will still get less than the full new pension simply because at some time in the past they had contracted out of the state second pension.
The Department for Work and Pensions has added to the confusion by issuing the most complex “factsheet” in living memory which, if it was ever intended to shed some light on the subject, has almost certainly achieved the exact opposite.
So how and why has this come about? Is it a case of simply explaining the rules better or is there something intrinsically unfair in what is going on here?
The root of the problem probably stems from the original Treasury dictat that the new state pension had to be introduced at no overall extra cost. This meant there had to be some losers as well as winners.
It also threw into focus the question of accrued rights, that is, Serps and S2P, and how best to give effect to them.
The simple solution would have been for the basic state pension to have been replaced by a new, more generous flat-rate state pension and pay out any residual rights to Serps/S2P on top, possibly as a one-off lump sum.
This would have ensured consistency of treatment with those who had contracted out and had the benefit of rebates or NI reductions in the past. But clearly that would have added to the costs so the Government had to look for an alternative way forward.
This was that any additional pension built up from Serps or S2P would be paid on top of the new pension only to the extent that when added to the old basic state pension the total exceeded the new full single-tier pension rate. This meant any accrued rights to Serps/S2P totalling less than about £35 a week at current rates would be absorbed within the new higher state pension and not have to be paid out in addition.
For those who had contracted out and had NI rebates/reductions instead of Serps/S2P accrual, a deduction based on a “rebate derived amount” would be made from the starting figure of the single-tier pension in April 2016, thus ensuring the same treatment between contracted-in and contracted-out rights.
All this has, of course, really thrown a spanner in the works of the Government’s previous claims the new pension would be a flat-rate, simple-to-understand pension which would largely eliminate the need for means-tested top-ups. It is clearly none of these things for many people, certainly not in the short-term.
The chosen treatment of accrued rights also produces a few anomalies when comparing different groups.
Someone who has never contributed to Serps or S2P, possibly has never paid any NI but has 35 years of credits, could receive a full state pension whereas someone with just a handful of years contracted-out out of, say, a 40-year NI record could well get less.
At the other end of the spectrum, someone aged 55 who at the start date next year has accrued a sufficient record in Serps/S2P from contracted-in service to have reached or exceeded the full single-tier level (£154 or thereabouts) will be stuck on that, notwithstanding having to continue paying NI for the next 10 or more years.
However, someone of a similar age with a contracted-out history and deductions might be able to claw back most if not all of the shortfall by virtue of continuing to pay NI and accruing extra pension.
All this is extremely complicated and confusing for people to get their heads round and it is hardly surprising many are now expressing their frustration about what they see as a failure of this new state pension to live up to the promises originally made for it.
The concept of having a single tier arrangement is undoubtedly a good one and over time it will hopefully become that flat-rate, easy- to-understand state pension we would all surely like to see.
At the present time, though, as we tread our way warily through the complex transitional stages, we seem to be rather a long way off ever reaching that position.
Malcolm McLean is senior consultant at Barnett Waddingham