The key to the successful implementation of the single-tier state pension lies in the government informing the public as soon as possible about how it will impact individuals, according to a report by the Work and Pensions Select Committee.
In its Single-tier state pension: part 1 of the draft pensions bill, the committee accuses the government of hampering its scrutiny of the proposals for a single-tier state pension. It claims that the government not only imposed an extremely tight timetable, but brought forward the implementation date by a year after the committee had completed taking evidence.
The committee’s report states that the change in the implementation date has significant implications, particularly for pension schemes and employers, which now have one year less to prepare for the end of contracting-out.
Consequently, the committee said that the government must work with them to ensure the transition is as smooth as possible and that defined benefit pension schemes do not suffer as a result.
Anne Begg, MP and chair of the Work and Pensions Select Committee, said: “We agreed to the government’s request that we carry out pre-legislative scrutiny of the single-tier proposals. This process is a vital mechanism in ensuring that significant reforms receive rigorous and effective scrutiny.
“I am disappointed that the government has hampered us in carrying out this task, by giving us very little time to do it, due to the delays in its own timetable for publishing the proposals, and then making a major change to the policy at a very late stage. “Such a cavalier attitude to the scrutiny role of select committees is unacceptable.
Nevertheless, we believe our recommendations are valid and that our findings will assist Parliament when it considers the finalised Bill in the summer.
“However, Parliament can only carry out effective scrutiny if the government makes the necessary information available to it. It is imperative that the government carries out a further impact assessment of the reform proposals, which takes particular account of the revised implementation date, and publishes it at the same time as the finalised Bill is introduced.”
Conclusions
The report makes a number of other conclusions and recommendations, including:
- The new implementation date of April 2016 should be set out on the face of the Bill.
- The Bill should specify that the minimum number of qualifying years will be not more than 10 years.
- The requirement for the level of the single-tier pension to be higher than the Pension Credit Guarantee rate is a fundamental principle of the reform and should be set out on the face of the Bill. When the Bill is before Parliament, the government should publish an analysis of the cost of setting the single-tier pension rate at a range of higher levels and the level at which the single-tier pension could be funded if the additional national insurance revenue was used for this purpose.
- The government should develop and publish a clear explanation of how means-tested support, including passported benefits, will operate under the single-tier pension, and the transitional protection that will be put in place.
- Many women born between 1952 and 1953 believed that they would suffer a double adverse effect on their state pension income, arising from the increases in their state pension age combined with their ineligibility for the single-tier pension, if it was introduced in 2017 as set out in the white paper. It appears that the government’s decision to bring forward the implementation date to April 2016 will mean that around 85,000 women born between 6 April and 5 July 1953, whose state pension age had been increased a second time in the 2011 Pensions Act, will now be eligible for a state pension under the new system. The change in the implementation date does not appear to bring any of the remaining women in the cohort born between April 1952 and April 1953 within the scope of the STP (although it is far from clear that all of them would have been better off under the single-tier in any case). The government should clarify the position, and set out the range of impacts on the state pensions of these women, in the revised impact assessment.
- Some women did not build up their own national insurance record because they had an expectation that they would be able to rely on their husband’s contributions to give them entitlement to a basic state pension. The government should assess and publish the cost of allowing women in this position who are within 15 years of the state pension age to retain this right.
Support
Begg added: “We support the principle of the single-tier pension. In the short to medium term it will mean more state pension for many people, particularly the self-employed, and women and carers who have been low-earners or had gaps in employment.
“It will be a much simpler system to understand and people will be able to see more clearly how much they can expect from the state. As a result, it will give greater certainty about the value of saving into a private pension scheme and will complement the new system of automatic enrolment into workplace pensions.
“But this is a major reform, which will affect all 40 million people of working age. Although the end result will be simplification, the transition period will be long and complex.
“Individuals will be affected in different ways depending on a number of factors, including their age, and their previous pension and national insurance contributions. There are already misconceptions about who stands to gain and who might lose. People closest to retirement understandably have the most immediate concerns.
“So it is vital that the government decides on its high-level strategy for communicating the changes to the public by the time the finalised Bill comes before Parliament in the summer. This should include how the internet will be used and what individualised information will be provided.
“Now that the implementation date has been brought forward to 2016, it is even more important that people receive understandable and accurate information as early as possible.”
We are in agreement with the Work and Pensions Committee’s observation that fast-tracking of the single-tier state pension reform to 2016 will come at the expense of proper scrutiny.
However, by calling on government to focus on the communication of the reforms to the public, the Committee has missed an opportunity to tackle the fundamental issue: that the government has developed an approach that penalises the majority of low-paid workers in the private sector, in turn wiping out any gains these employees received from auto-enrolment.
Under current plans for state pension reform an individual earning less than £14,700 in the private sector could lose around £2,500 a year (c. £50 per week) in state pension when they come to retire.
Generally, these changes amount to a 20% shortfall in state pension for private sector low earners. Even at the post-2018 8% contribution rates, auto-enrolment won’t close this gap and millions of employees will see a fall in retirement income having paid for the privilege.
The transition arrangements to the new single-tier state pension generally benefit those employees who have contracted-out of the state second pension. This is mainly public sector schemes and, as a result, the public sector benefit from the transition to the new arrangements making a mockery of the recent Hutton reforms.
We are already getting phone calls from clients, asking for help in working out what they should do with regard to their pension planning, because they don’t know what they can expect from the state. The sooner the government can issue clear, individual statements to everyone, starting with those retiring in 2016 and 2017, the better.
We expect that the loss of the national insurance rebates will kill off the lingering vestiges of final salary pension provision in the private sector; already since the announcement of the change to a 2016 start date we have now seen Axa announcing a review of its defined benefit scheme and specifically citing the loss of the rebate as an issue.
The committee does appear to be quite upset that the late change to the state pension timetable has undermined its scope to properly scrutinise the Bill. It would perhaps have been better if the government stuck with its original plan of 2016 all along, rather than chopping and changing its timetable according to prevailing short-term political considerations.
The committee is right to urge the government to do more to explain its state pension reforms to the general public and to call for a revised impact analysis to be presented to Parliament in light of the bringing forward of the implementation date by one year to April 2016.
The new single-tier pension will indeed, in the long term, be a much needed simpler system and will provide greater certainty about the value of private saving on top. It will be beneficial to low earners, many women and the self-employed, but it will not materially benefit everyone.
In the final analysis, there will probably be more losers than winners, notably in the middle to higher-earner classes. Ministers would be well advised, therefore, to stop trumpeting this as the best thing since sliced bread and explain more fully to individuals how all this is going to work and which side of the fence they are likely to fall.
As the committee has also observed, the transitional arrangements are especially complex and I am not sure the government has really thought through the almost Herculean task it faces of calculating and establishing a ‘foundation amount’ for all of 40 million people of working age at the start date in 2016 (now a year earlier than formerly proposed).
Or, indeed, what are the operational implications of running two completely separate systems side by side for the next 40 years or longer (existing pensioners before 6 April 2016 will continue under the present system).
The report highlights that the change in the implementation date has significant implications for pension schemes and employers, who now have one year less to prepare for the ending of contracting-out. Employers who are providing defined benefit (DB) schemes for their workers will have a particular concern. The end of contracting-out will mean that both employer and employee national insurance (NI) contributions will increase.
I estimate on current price levels that a typical worker earning the average salary of £25,000 will pay an extra £270 a year with the employer having to stump up £657. For any employer with a sizable workforce this could amount to hundreds of thousands of pounds extra NI they will have to pay out every year and, as we have seen from one recent case, this could be the catalyst for them deciding to close the scheme down altogether.
It is to be hoped that the government heeds the committee’s exhortation that it must work with employers to ensure the transition is as smooth as possible and that DB pension schemes do not suffer as a result.
The Government is intentionallyand specifically discriminating against approx. 400 000 women vis a vis men of the same dates of birth which is<1952 to April 1953 birth dates as men of the same birth dates will get the 'better' STSP whilst these women will not and yes it is a better pension for many thousands of these women are/have been low paid/caring and and some are also in ill health they will have waited up to 2 to 3years under the in force 2010 equalisation yes they will get the lower SP for a year or two earlier however that dwarfs over the rest of their lifetime that the men same dob get the better (which is why these thousands of women need the better) STSP
Winter Fuel Payment Bus Passes and if applicable Pension(Means tested) Credit have all been lowered down for all the men in the same age group as these women so that they receive these 'benefits' at the Govt. dictated SPA. It is just purely specific age and gender discrimination against these women who are now 60 years of age: just the sort of low paid females *(who have ow 42 years of NI and will have 44/45 NICs by 2015/6)* Steve Webb says he wants to help....
He said he woud treat no one adversely that is patently not the case also he treated the W&P Select Cmmttte Pre;legislative scrutiny with disdain. Shame on you S Webb