Never before in the field of UK pensions has so much been done so quickly for so many.
The past six months has been like an exploding spot for UK pensions – the pressures building up for years from the facts that people are living longer, markets have stalled and companies have been required to fund their pensions on a stricter basis – have been lanced The result has been messy , the sore is very visible but ultimately we probably feel relieved.
Let’s look at the big picture in terms of “what”, “when” and “to whom”
Workplace Pensions will now rise in line with CPI rather than RPI. This will lead to lower increases in your pensions in payment and will ease the pressure on the finances of pension funds that provide a defined benefit. As the majority of people in defined benefit schemes (including those currently receiving their pensions) are in the public sector, this will benefit public finances most.
The exception to this is the Basic (old) Age Pension which will go up in line with Average Earnings and will go up faster than previously. This is particularly good news for the poorest pensioners and will hurt the public finances.
Not only will those in the Public Sector see lower increases in their pensions, they are likely to see a different formula for calculating the amount of pension they receive. Details of this will not be published till next Spring but it’s likely that the new formula will hurt the better paid and least effect those on low incomes. It is possible that these cuts could effect pension already built up (as the BBC are proposing to their members) but it’s more likely that this will only affect rights on future earnings.
Almost everyone not in a workplace pension will be required to join a pension which they will have to opt out of if they meant to avoid making personal contributions. As part of this change, the Government are introducing a new state organised pension called NEST, the benefits of which will not be guaranteed but will depend on the markets.
Finally Vince Cable and Steve Webb have also announced it is the Government’s long-term goal to increase the Basic State Pension by about 35% and do away with a lot of the complicated rules governing the Second State Pension (formerly known as SERPS, now called S2P. A lot of the messy rules on Pension Credits and other means-tested benefits will also be simplified
The changes to the way that pensions increase are almost immediate.
The Basic State pension is going to be delayed for those drawing their Basic State Pension which means those in their late 40s and early 50s will have to wait till they are 66 to get their first payments. This is particularly hard on woman who were expecting to retire a lot earlier than men (though there’s some consolation that they continue to live longer than the male of the species!)
We don’t quite know when the changes in public sector pensions will take place but we do know that the new rules requiring people to join pensions under “auto-enrolment” will be phased in between 2012 and 2017 (bigger organisations will go first).
Whether the proposed changes in The Basic State Pension envisaged by Webb and Cable see the light of day is dependent on a long-term political consensus but are unlikely to be introduced till the final years of the decade at earliest.
These changes are sweeping, they will impact everyone to varying degrees though the biggest losers are likely to be those with high or potentially high earners.
Because pensions are hard to understand and take time to be felt- all this may seem a little unreal – certainly compared to the immediate issues with jobs, housing and public services. However the scale of these changes is likely to be enormous both in terms of how but also in terms public finances.
Many of these changes have been considered unde the previous Government, the plans for auto-enrolment and NEST were instigated by Labour while the changes to state pensions have been advocated by various Labour politicians – particularly Frank Field without getting Cabinet support.
If there is to be cross-party support for these changes , it will require support from the general public and the Unions. The Coalition have been working hard to soften the blow by introducing changes to the tax-regime for the super-rich and stressing that the changes will be progressive, benefiting those on poorest incomes at the expense of higher-earners.
Again, much has to be taken on trust. The wider picture of public sector cuts is relevent. The high interest rates being paid by Governments like Greece and Ireland on their debt is partly attributed to the runaway costs of their pensions and it’s not gone unnoticed by those who lend us money that the cost of public sector pensions is estimated by non Governmental experts at £1.2trillion rather than £0.78trillion by the previous Government.
There is likely to be close scrutiny on what the changes really mean to public finances by rating agencies and global banks and their economists. There is also likely to be scrutiny of some of the claims made by Government on the impact of changes on the rich.
Support for the short, medium and long-term changes announced will be generated from trust that the Government numbers are real and not spun for effect.
As we see more of the changes and have a chance to check the numbers, those who are pension experts outside of Government will have an important job either to win support from those impacted or to warn them that they are not what they seem.
If you’ve read this far, you can probably guess I see a part of my job as doing just that so I hope you keep reading my blogs as they will return again and again to these big issues which are so important and so hard.
- Major overhaul for state pension (bbc.co.uk)
- Pensions: What does £140 a week really mean? (guardian.co.uk)
- What do the Con-Dems changes to pensions mean for you? (mirror.co.uk)
- “A universal pension above means testing levels?” and related posts (touchstoneblog.org.uk)
- All-in-one £140 pension ‘fairer’ (thesun.co.uk)
- Welcome news from Vince Cable on pensions (libdemvoice.org)
- New flat-rate pension would see payments raised by £40 a week (independent.co.uk)
- Problems remain for the government over pensions reform (leftfootforward.org)
- Pension revolution (bbc.co.uk)
- Pensioners: Your guide to the spending review (confused.com)