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Means to an end

Annie Shaw says more of pieces of the reform puzzle are falling into place

The irony of an uprated basic state pension being introduced by a Conservative-led government will not be lost on welfare policy watchers.

While it is true that the drivers of the proposed increase in state pension to around £140 probably come mostly from the Liberal Democrat side of the coalition, the fact that this particular retirement reform is being overseen by a Conservative prime minister will provoke some wry smiles.

Back in 1997, the Labour party led by Tony Blair won the General Election not just by stirring up the electorate’s revulsion over the tide of sleaze that had engulfed the incumbent Tory administration but also by scaring voters over alleged Conservative plans to dismantle the NHS and abolish the state pension. John Major was forced to seize back control of declared Conservative policy by announcing: “I’d leave politics rather than abolish the state pension.”

Yet three years later, in 2000, there was still talk among some Conservatives that, if ever they returned to power, they would allow savers to opt out of the state pension altogether and divert National Insurance contributions to private schemes.

This was seen as a natural successor to the Thatcher Government’s philosophy of 20 years earlier when it began the process of allowing the state pension – in Secretary of State for Social Security Peter Lilley’s words – to “wither on the vine” by breaking the link with average earnings.

In the ensuing years of Labour, Tony Blair and Gordon Brown did nothing to restore the value of the state pension and were content to watch it gradually slump in relation to earnings. This left increasing numbers of pensioners, many of them women who had left the workforce to bring up families, forced into the humiliation of applying for means-tested benefits, which Gordon Brown seemed to delight in making ever more “targeted” and complex.

The 2011 Retirement Planning Monitor survey, which interviewed more than 1,100 adults aged between 22 and 64, found that 70 per cent of respondents had no idea how much retirement income they would receive and as many as a quarter of respondents between 55 and 64 years old – those in the crucial decade immediately before the traditional male state retirement age – still had no idea how much state pension they
would receive.

They were not alone in finding the current regime confusing. Even Steve Webb, the pensions minister, said recently that officials often “find it difficult to figure out how much someone approaching retirement will get from the state”.

Saga director general and former government pensions adviser Dr Ros Altmann says: “Because of the reliance on mass meanstesting, our current state pension system undermines private pension saving. Even on the Government’s own figures, one in 20 future pensioners could see no value from their private pensions, so they will have wasted their contributions. No wonder people are reluctant to save in a pension.”

The problems with means testing and complexity have been acknowledged by Work and Pensions Secretary Iain Duncan Smith. Announcing the Government’s intention to reform the state pension last month, he declared: “The system is so complex most people have no idea what it will mean for them now and in their retirement. Too many people on low incomes who save for retirement find those savings clawed back through means testing. We have to change this.”

Yet, while it may seem that the increase in the basic state pension is a remarkable about-face for the Conservatives, the proposal is a natural fit with the other pieces of the jigsaw puzzle of retirement provision reforms that are now falling into place. These include the raising of the age at which the state pension can be claimed, reduction in the number of qualifying years of National Insurance payments to receive a full pension,
automatic enrolment into company pension schemes, reform of public sector pensions and the abolition of a compulsory retirement age for those in employment.

Altmann says: “After years of watching our pension system falling apart, it seems that Iain Duncan Smith may finally be getting to grips with the inadequacies of the UK state pension.”

The Tories can’t claim all the credit, of course. The previous Labour Government had already started to implement several pension reforms, such as reducing the number of qualifying years of National Insurance contributions to 30, and similarly pledging to restore the earnings link.

But it is giving vast numbers of pensioners a guaranteed income level above the current means testing level that will play the most significant part in pension reforms.

Annuity provider MetLife UK estimates that to achieve an index-linked income of £140 a week – the amount being suggested for the new state pension from the age of 65 – someone investing in a private pension would need to have accumulated a fund of £217,000. Yet, far from encouraging people to save, won’t increased retirement provision by the state make people complacent and less likely to save for themselves?

The system is so complex most people have no idea what it will mean for them now and in their retirement. Too many people on low incomes who save for retirement find those savings clawed back through means testing. We have to change this’

Yellowtail Financial Planning financial planner Zac Ghadially doesn’t think so. He says: “I don’t know about anyone else but £140 a week still doesn’t seem like a lot to live on. The benefit of having a higher state pension is simplification. It makes it clear how much people have to build on with their own savings and will cut down on the various benefits and top-ups such as pension credit, which will save money for the Government in terms of administration.”

More details about the new state pension, which is expected to come on stream no earlier than 2014, will be published in a green paper, probably to coincide with the Budget. The key question will be how the current and new systems will integrate.

If the new scheme applies only to new or fairly recent entrants to the employment market, with no second pension entitlements, means testing of existing pensions could remain with us for another generation. If everyone receives at least £140 but those who have saved in Serps or S2P get nothing, there will be uproar from second pension savers. If second pension savers get Serps on top of a £140 basic pension, it is
not clear how the funding figures stack up.

Altmann believes, however, that the money could come at least in part by stopping contracting out.

She says: “If there was a flat-rate state pension, the Government would be able to end the current practice of allowing people to contract out of the state second pension.

This could bring in an extra £8bn in National Insurance contributions each year, £5bn of which would come from public sector workers and employers. This extra revenue would also save money in the longer term because public sector pension schemes would not have to pay the replacement state second pension from scheme pension age, it would just be paid from state pension age.”

What seems to be likely is that there will be some sort of melded scheme involving anyone currently below state pension age, leaving those who are already drawing their pension unaffected.

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