Plenty of credit should be given to pensions minister Steve Webb for pushing through his plans for a flat-rate state pension, despite many obstacles.
The reforms will in time remove layers of complexity which have confused the public and turned them off saving.
Importantly, in cutting down on pensions means-testing they remove a big disincentive to save which threatened to undermine the Government’s auto-enrolment reforms.
There are winners, notably the self-employed, low earners who would not have qualified for pension credit and those taking time out to bring up children, and losers. Inevitably much of the media will focus on the latter. Pensioner groups are angry the reforms will only benefit new retirees but a retrospective hike to pensioner benefits was unaffordable.
Critics focusing on the effect on younger people, compared to what they could have potentially achieved through the current creaking system, miss the point. Was it ever realistic that the same complex rules would be in place in 30 years? For the first time young people should have a good idea of what they are likely to receive from the state in retirement, and therefore what they need to achieve themselves to supplement this amount.
Scrapping contracting-out was always going to be the most tricky manoeuvre, especially with the Government’s hands-tied by its recent public sector worker agreement not to touch their pensions again for 25 years.
For private sector DB schemes having to deal with the loss of the 3.4 per cent employer NI rebate, the Government wants to introduce a number of measures to make it easier for them to reduce future benefits or increase contribution rates. The flexibility will possibly save schemes from closure but will impact on members.
The majority of contracted-out DB employees are public sector (5.3 million out of nearly 7 million). Due to the Government’s recent deal this big employer hit will be paid for by the taxpayer or by cutting services.
Those who were contracted out will have to start paying full NI contributions- an extra 1.4 per cent between rate bands- but will be building up extra state pension up to the new £144 level. The Government estimates 90 per cent of those retiring in the first 20 years will gain enough from the state pension to offset extra NI contributions and scheme adjustments.
The reforms offer a fair deal and a solid foundation for auto-enrolment, with a clear incentive for people to save for their own futures. The biggest worry is meddling from future politicians who have proved time and again their inability to leave pensions alone.