The Pensions Bill 2013 includes provision for the single tier state pension from April 2016, bringing the state second pension and ‘contracting out’ to an end.
The initial impact will be that employers and employees currently paying reduced rates of NI will see an increase in contributions. Although employers may be able to postpone specific action until the changes become law, there will be planning and strategic considerations that they will need to address.
Increased NI contributions for the employer on top of the funding requirements for their DB scheme will have a significant impact. Action may be necessary to neutralise or mitigate the affect of increased costs. There will also be an impact on scheme members and potentially changes may need to be made to schemes to address that issue.
In theory, changes to the way future benefits accrue could reduce costs but the most significant costs of most DB schemes are in relation to the benefit promises for ‘past service’.
The current two tier state pension will apply to those reaching state pension age after 5 April 2016. Those who do so before 6 April 2016 will receive their state pension in line with existing rules.
Individuals making NI contributions entirely under the new single tier regime will receive a single amount based on 35 qualifying years of contributions. The current qualifying period is 30 years with no minimum qualifying period. Under the single tier approach, those with fewer than 35 years when they reach state pension age will get a pro-rata amount and will have to have a record of NI contributions of seven to 10 years to get any single tier pension at all.
Those with NI contributions or credits under the current system will see their two tier pension converted into an equivalent single tier ‘foundation amount’. Providing that they meet the minimum qualifying year requirement, they will get no less than the amount calculated using the present scheme rules.
The current ability for individuals to inherit or claim rights based upon a spouse’s contribution history will no longer apply. The new arrangement will be based upon an individual’s qualifying record but some transitional protection will apply for those with NIC or credits under the current system.
Currently, state pension age for men and women is moving towards equalisation at 65 and is due to rise to 66 by October 2020, 67 by 2036 and 68 by 2046. There are provisions in the Pensions Bill to accelerate the increase to 67 so it will occur between 2026 and 2028. State pension age will then be reviewed at five yearly intervals and adjusted as necessary
There are mixed views over the changes and how they will affect individuals. Despite the Government’s assurances that the changes will make most people better off, the TUC and the Institute for Fiscal Studies fear that millions will actually be worse off.
The big question is probably whether for those individuals, their workplace pensions will make up any shortfall.
Mark Pearson is business development director at Origen Financial Services