Oh No – bad news. Government delays plans to radically reform State Pension

Flat-rate state pension now in doubt

How can NEST go ahead if we have continued mass means-testing of pensioners?

by Dr. Ros Altmann

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It seems that the Government will not now issue its planned consultation on radical state pension reform. This was expected before year-end after the DWP, earlier this year, said it would issue a Green Paper and consult on paying a flat-rate state pension of at least £140 a week to all new pensioners with a full National Insurance record. The Treasury seemed to be in agreement too, so why is it not happening?

Steve Webb, our new Pensions Minister – and the first one for years who actually understands pensions – knows that without radical state pension reform we cannot revitalise pension savings properly.

Pensions are not a suitable product for many of those who will be automatically-enrolled into workplace pension schemes, because they will risk losing much or all their pension in the State pension means-test. Nearly half of pensioners are entitled to Pension Credit and the idea of paying a State Pension above Pension Credit level would simplify the pension system and enable people to understand what they will get from the State.

As recently as 16th November, Chancellor George Osborne seemed to be committed to the idea of a flat-rate state pension.

In response to the Parliamentary Question ‘Will the Chancellor commit to working closely with …Steve Webb to introduce the universal, flat-rate, minimum pension for all citizens as quickly as possible? George Osborne said ‘Yes, absolutely. The Treasury is working with the DWP on potential pension reform that could simplify pensions and provide a boost to pensioners for many years to come’.

So what has thrown a spanner in the works? One can only speculate, but perhaps the problem is around our system of ‘contracting-out’. Introducing a flat-rate state pension which joins Basic and Second State Pensions into one payment, would mean ending the ability for people to opt out of the State Second Pension and save in an employer scheme instead.

Ending the contracting out of State Pensions would actually be very good news, it would bring in an extra £8billion a year of much-needed revenue, to offset the costs of a higher state pension and would also save employers money in the long-term too. However, this would mean that public sector workers and employers and those with private sector contracted-out pension schemes would have to pay the same rate of national insurance as everyone else. At the moment, these workers pay the so-called ‘contracted-out rate’ which is lower than the full rate.

Could the Government be frightened of asking public sector workers to pay more National Insurance? I hope that this much-needed reform of state pensions is not held up by a desire to maintain the horrendously complex and costly system of contracting-out.

I really do hope that the DWP manages to push this reform through, as it is so urgently needed.

We mustmake it safe for people to save in a private pension by paying a proper State Pension without means testing, or allowing people to get their pension money back by turning the pension into an ISA. Otherwise, the policy of automatic enrolment could end in tears.

NOTES FOR EDITORS:

Here is a link to the Parliamentary Answer from George Osborne in November
www.theyworkforyou.com/debates/?id=2010-11-16a.725.3