The state pension is in a bit of a mess – reform and simplification of this state benefit is widely regarded as long overdue. This reform, which had got off to a good start in 2011, now seems to have stalled and possibly it has been derailed by the Government’s battle to reform public sector pensions.
In April last year, the Government published a consultation paper which looked at reform of the basic state pension and the state second pension into a simpler system, including the option of merging the two into one broadly universal state pension to which the majority of future pensioners would become entitled.
In July, the Government published a summary of the responses, with the majority of respondents giving support to the more radical option of a rapid merger of the BSP and the S2P into one relatively universal state pension. From this emerged an expectation that if the Government does go ahead with the reforms, the unified simple universal state pension would be the most likely outcome.
Since then, though, we have heard nothing. This is surprising because pensions minister Steve Webb had nailed his colours to the mast. Along with the delivery of auto-enrolment, reform of the state pension is top of his to-do list, so why have we not heard anything for six months?
No doubt, much of Steve’s time has been taken up with auto-enrolment and ensuring its smooth delivery. The fact that its timetable has been pushed back, presumably at the insistence of the Treasury, is evidence of the effort this requires to keep it on track. It is also possible that the Treasury is getting cold feet about the knock-on impact that reform of the state pension would have on its negotiations with the public sector unions over their finalsalary schemes. This is because a move to a single-tier universal state pension would necessitate the abolition of S2P which would mean the end of contracting out.
The end of contracting out would mean an increase in National Insurance rates for the five million public sector workers who are currently contracted out through their final-salary schemes. It is a safe assumption they would react very badly to being asked to pay an additional 1.4 per cent in NI on top of the 3 per cent increase in member contributions which the current Treasury-led reforms of public sector pensions have demanded.
Reform of the state pension would hlep with a smoother delivery of auto-enrolment. A simple universal state pension would make it easier for individuals to focus on the amount they need to save on top in a private pension. By contrast, the current mess of state pension and welfare entitlements will deter individuals’ engagement and understanding and will lead to lower savings rates. I hope Steve’s state pension reform is merely delayed rather than abandoned and that we hear more on it sooner rather than later.
Tom McPhail is head of pensions research at Hargreaves Lansdown