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State line

For years, many people considered the payment of the state pension as an insignificant bonus, a small addition to a decent pension from an employer’s occupational pension scheme or a top-up to a personal pension for the self-employed. For low-earners, however, many of whom have not been in pensionable employment, the state pension has often been their sole income, their financial lifeline in retirement.

Some, therefore, consider the state pension to be a paltry amount while others see it as the main pillar of retirement income. What has not been recognised is that the state pension is a defined benefit, an increasingly precious commodity.

The current financial crisis is having an impact on different individuals in different ways. Many employers have closed defined-benefit schemes to new entrants or are removing members’ rights to future DB accrual.

Some schemes have needed large cash injections from employers to make good deficits caused by falling stockmarkets while others have had to be propped up by the Pension Protection Fund.

The benefits to members of DB schemes are less secure than they were before the credit crunch but nevertheless the value of a defined-benefit pension is still at a premium.

Members of defined-contribution schemes are more directly affected by the recent falls in investment returns, especially those who have taken or are about to take their pensions.

There is no guaranteed amount and they are also at the mercy of falling annuity rates. For those people, the defined-benefit nature of the state pension could be a significant guarantee.

In view of the increased importance of state pensions, therefore, it is worth reviewing some of the improvements introduced in 2007 to make the system fairer in future.

Fortunately, the Government has recognised the need to increase state pensions for some groups who have been disadvantaged in the past, in particular, women and those with caring responsibilities. The reforms will also mean that pension entitlements between men and women will converge more quickly.

From 2010, the number of years needed for a full basic state pension is reduced from the current level of 39 for women and 44 for men to 30.

The minimum number of qualifying years needed to qualify for any BSP has also been removed.

The BSP will be increased in line with average earnings rather than prices possibly from 2010 or from 2015 at the latest.

The system of credits for carers has been improved so that more carers will qualify for a credit towards BSP and more people caring for children or for people with disabilities will receive credits within the state second pension.

One effect of the reforms to state pensions will be to increase the proportion of women who receive the full BSP.

Currently, only around 30 per cent of women reaching state pension age get the full BSP, increasing to 50 per cent by 2010 and 80 per cent by 2025 but with the reforms 70 per cent of women reaching state pension age in 2010 could receive the full BSP rising to 90 per cent by 2025 (according to the Department for Work and Pensions).

The guarantees of the state pension are becoming increasingly important at a time when the promise of a defined-benefit pension in a private pension scheme becomes increasingly rare.

Tony Reardon is principal of Reardon Consulting

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