Problems remain for the government over pensions reform

So far we have few details, and all that has been confirmed by the Department for Work and Pensions is that there will be a green paper – the most tentative form of government policy statement – before Christmas.

Steve Webb has an honourable record of campaigning for better state pensions and a better deal for women in particular. As a former staff member of the Institute for Fiscal Studies (before it attracted the ire of his party leader) and social policy professor he comes to his job as pensions minister with more knowledge of pensions and benefits than many of his predecessors.

He will know therefore just how difficult a challenge he has set with his plans to introduce a new universal state pension that will lift pensioners above means-testing levels.

So far we have few details, and all that has been confirmed by the Department for Work and Pensions is that there will be a green paper – the most tentative form of government policy statement – before Christmas.

There is much to be said for such a policy, but while it may be a cliché, this is a proposal where the devil will be in the detail. There is no magic pensions money tree, and if some people are to benefit, then others will have to lose if we assume that George Osborne has not suddenly discovered an obscure Treasury basement stuffed with gold.

So what might be involved? At present pensioners have three broad sources of cash from the state:

1. The basic state pension (currently £97.65 a week for single people and £156.15 a week for couples) is a contributory benefit. You need to have enough full National Insurance contributions to qualify for the full amount.

Most people who miss out are women – either because they paid a reduced married rate of NI, were in part-time work below the NI threshold or because of broken work records.

2. Means-tested benefits of which the most important for pensioners is pensions credit. This aims to ensure that single pensioners have an income of at least £132.60 a week or £202.40 for two people living together.

3. The least understood part of the pensions system is what is technically known as Additional Pension, but this a catch-all for a range of different bits of state pension provision. The best known of these is still SERPS – introduced by Barbara Castle as an earnings-related pension for employees who did not work for a company that provided a pension.

This was severely cut back by the previous Conservative government, and then transformed by Labour into the State Second Pension, S2P in the jargon, which overtime is becoming a flat-rate top up to the basic state pension.

The press leaks today suggest the Green Paper will make two main suggestions.

First the contributory principle for the basic state pension will go, and it will become a residence based Citizens’ Pension. This will undoubtedly help women, but research has shown that voters have a strong attraction to the contributory principle – you put something in and you get something out in return.

Secondly the basic state pension and the additional pension will be rolled into one and set at a level above pensions credit, thus getting rid of a great deal of means-testing.

This has obvious attractions. Poorer pensioners would no longer need to go through means-testing (and many don’t claim) to get a pension income above the poverty threshold. It would also encourage people who are working to save for retirement as their savings would not count against mean-tested benefits.

But while scrapping means-testing would save some administrative costs this would not provide enough to fund a £140 basic pension for everybody.

The most complex bear-trap is that not everyone builds up an additional pension. Occupational schemes can opt out and get smaller NI contributions in return, and the last Conservative government gave a new right for individuals to opt out and instead receive state contribution to a private pension – though what seemed a good offer at the time has turned out to be poor value by the time people actually retire.

The problem that Steve Webb faces is therefore two-fold.

If everyone is to get a new universal pension of £140, who is going to pay for it? Those who have built up a state second pension that gives them an income of more than £140 will not be happy if they lose it. Wrapping up universal pensioner benefits such as winter heating help would simply repackage existing payments.

Secondly people who have opted out of the state second pension and built up a private or occupational pension will do rather well if their state pension gets bumped up to pension credit level as they have no S2P to lose. Of course you could introduce the equivalent of means testing for those who have opted out, but then you lose the supposed simplicity of the new approach.

Nothing is ever simple in pensions reform. This move is undoubtedly well-intentioned, and if achievable in a fair progressive way would be a real advance. But there are also real difficulties, and if this move is to be supported we need good answers to the key question: who pays?

11 Responses to “Problems remain for the government over pensions reform”

  1. Nigel Stanley

    I have a post on the TUC Touchstone blog that goes through the costs in more detail

  2. jonathan

    I think there is a basic confusion here between minimum age (60) and 65 ( for men). Ive pasted off the Gov site below.

    Guarantee Credit
    If you are living in Great Britain and have reached the minimum qualifying age, you may be entitled to the Guarantee Credit. This guarantees a minimum income by topping up your weekly income to:
    £132.60 if you are single
    £202.40 if you have a partner
    These amounts may be more if you are disabled, have caring responsibilities or certain housing costs, such as mortgage interest payments.
    The age from which you can get the Guarantee Credit – the qualifying age – is gradually increasing from 60 to 65 between April 2010 and 2020. To find out the age when you may be able to apply for Pension Credit, you can use the State Pension age calculator.
    The State Pension age for both men and women will rise in the future. The government is reviewing the current timetable for increasing the State Pension age from 65 to 66. No decision has yet been made as to how the timetable will change. Any change will require the approval of Parliament.
    Changes to the State Pension age are likely to affect the Pension Credit qualifying age.
    While you must have reached the qualifying age, you can still claim if your partner is under the qualifying age. If you or your partner are both over the qualifiying age either one of you can apply.
    ‘Partner’ is used to refer to:
    your husband
    your wife
    your civil partner
    the person you live with as if they were your husband, wife or civil partner
    State Pension age calculator
    Age 65 or over – Savings Credit
    If you are aged 65 or over and living in Great Britain you may be entitled to Savings Credit. You may get the Savings Credit on its own or with the Guarantee Credit. You may be entitled to Savings Credit if you:
    are aged 65 or over
    have made some provision towards your retirement such as savings or a second pension
    If you have a partner, at least one of you must be 65 or over to get the Savings Credit.
    The Savings Credit can be up to:
    £20.52 a week if you are single
    £27.09 a week if you have a partner
    You may still get the Savings Credit even if the money you have coming in is up to about:
    £184 a week if you are single
    £270 a week if you have a partner
    These amounts may be more if you are disabled, have caring responsibilities or certain housing costs, such as mortgage interest payments.

    The idea of £140 seems to ignore all this as it is not related to ones income/savings. I know pension credits and savings credit seem complex, but they can help people with very little. With £140 and reduction in Housing benefits and other benefits planned I wonder how many will be better off. It looks like a Trojan Horse.

  3. David

    Shouldn’t the £132.60 be going up by inflation anyway? Which brings the minimum pension to nearly £140…. Something Pensioners should be expecting this year… not in the future as a part of some green paper that could be implemented in 4 years time.

  4. Web links for 26th October 2010 | ToUChstone blog: A public policy blog from the TUC

    […] Problems remain for the government over pensions reform Nigel has a Left Foot Forward guest post on the challenge ahead of Steve Webb in reforming our state pensions. […]

  5. Ian

    Although we can expect the pension to go up for inflation next year, the $132.60 is only for single pensioners – for couples it is currently 153% of that, not double.

Comments are closed.