The House Magazine state pension reform piece July 2012

by Dr. Ros Altmann

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The Government should soon release its promised White Paper, outlining plans for radical state pension reform. The current state pension system was designed decades ago and has been tweaked and adjusted piecemeal, leaving a complex mess that most people do not understand.

And, for far too long, women have been second class citizens when it comes to both state and private pensions. With lower lifetime earnings, it is not surprising that women save less and have lower private pensions, but paying women much lower state pension too seems socially inequitable. Society needs women to fulfil important family caring roles, leaving less time in the labour market and lower earnings, so the state pension system should not penalise them in retirement too.

The White Paper will reveal the full details are important, but this article looks at the likely changes.

There will be a new flat-rate state pension of £140 a week (in 2010 prices), which will be worth over £160 by 2016. This is just above the current Pension Credit means-test level and will eventually replace Basic State Pension and all Additional State Pensions with one payment. It will not be a citizen’s pension, but will be based on age and having a full 30-year National Insurance contributions record. It will not apply to existing pensioners, only men born after April 1951 or women born after April 1953 will be included.

Currently, nearly half of pensioners are entitled to means-testing, which penalises their private pensions, savings or earnings but the new system is designed to reduce this problem. Women, the self employed and pensioners on modest incomes with private savings will be winners. 60% of women (30% of men) retiring in 2016 would have less than the £140 a week in the old system, and will get higher state pensions. Anyone already entitled to over £140 from past rights will still receive the higher amounts, so there will be years of transition to the full new scheme.

This new system will reduce, but not eliminate, pensioner means-testing. Future pensioners without a full NI record (mostly women who paid married women’s stamp or earned less than the lower NI threshold), or those needing Housing Benefit or Council Tax Benefit may still be means-tested.

The changes will be cost-neutral, so state pension spending will not rise overall, the money will just be spent differently. Savings from increasing state pension age, abolishing Savings Credit and paying nothing to those with under 7 years’ NI contributions will offset the increased state pension costs.

Contracting-out of the state pension system will end (since there will be no Additional State Pension to contract out of), so private schemes will be allowed to reduce their benefit structure in recognition of no longer having to replace state pension rights. Interestingly, public sector pension schemes may be unable to do this due to the recent 25-year reform deal. Ending contracting-out will mean workers and employers with contracted-out pension schemes can no longer pay reduced national insurance rates, but there will be a better state system in future.

Radical reform is long overdue and, with auto-enrolment of low earners into workplace pensions, it is important to end mass means-testing. Hopefully it might be possible to include existing pensioners (perhaps the very oldest first) into this new system, to overcome the sense of unfairness they may feel at being kept on the old arrangements.