The Government has plans to change our pensions, not just what we receive but when we receive it. The main thrust of its latest Green Paper is that the State Retirement Age is going to be pushed back regularly in line with changes in life expectancy. To most people, this is of more importance than whether the state pension is paid at a flat rate or (as it is now) at a variable rate depending on the amount of national insurance you pay in your lifetime.
The Government is saying to its electorate “sorry, we got it wrong” we failed to anticipate how long we are going to live and we’re all going to have to work longer (than those retiring today). When the word “all” is involved, people will generally accept the principle and move on even when it’s as important as whether you have to go to work or not.
It’s pretty easy for Government to play the “mea culpa” card here because of course it wasn’t this bunch that got it wrong – another case of “another fine mess you’ve left me with”.
The Government’s radical plan is to abolish the variable state pension (S2P) and do so retrospectively. This is highly contentious as it means that, not for the first time, some people who thought they were going to get “x” from their National Insurance payments will get (x-something) and some people who didn’t pay much national insurance will get x +something).
This is because, instead of redistributing the cost of better pensions for the poor across the entire tax system, the Government wants this reform to be “cost neutral” among all retirees – those who pay NI will pay for those who don’t.
My criticism of the Green Paper is that while it is long on philosophising on the need for fairness and for personal responsibility, it’s short on identifying the winners and losers in the process. How can we comment on “fairness” when we aren’t told how the redistribution is going to happen?
I have no difficulty paying for those who cannot earn because they care or are cared for. That’s part of my civic duty. I don’t mind paying more NI or getting less pension if it means that the poorest earners get fairer pensions, but I have great difficulty subbing the feckless self-employed who – unlike their employed counterparts, have got away with paying little NI and little tax either through non-decalaration or through sheer idleness.
There’s a widely held opinion, not often acknowledged by Government but real nonetheless, that the self-employed do not contribute properly to society through the taxation system and should not be given a leg-up in retirement unless they pay for it.
The Government should make it perfectly clear that the price of a decent flat rate pension and the abolition of means-tested pension credits should not just be born by the people who have paid their NICs but should also be paid by those who have earned but not paid their NICs (who should be asked for some back-payment now).
Moving on from “fairness”, the Government wants us to consider the issue of “personal responsibility”. As usual “personal responsibility is defined in terms of people’s savings behaviour going forward. Teh Government are keen to take credit for encouraging people to use NEST , other occupational and personal pensions to supplement their state benefits but this paper is noticeable silent about the fate of those who either personally or through occupational pensions, took responsibility for parts of their state pensions by contracting-out.
Like millions of others I took the decision to contract out of the variable element of the state pension system by contracting-out. I did so because I was promised a fair rebate of my NICs into a personal pension and because I trusted a bird in the had (that contribution) rather more than a bird that might or might not emerge from the bush.
While it is becoming clear that the bird emerging from the bush is going to emerge much later than I’d hope, it is not at all clear what kind of bird I’ll be getting. The Government is planning to deduct some element of my new uplifted state pension because fo my “contracting out” decision (See above) but what will that deduction be based on? Will it be on the pension from the money in my personal pension, or a flat rate deduction without reference to my earnings or will it be a deduction based on the amount I would have earned if I’d stayed in the variable state pension (SERPS/S2P)? Whichever route they chose, it will become clear just how much I’ve won or lost from the contracting-out decision and from the changes envisaged by the Green paper. Now I’ve taken personal responsibility for my pension but I have no control over that decision’s outcome – I’m being asked to comment on whether this system is fair and whether it encourages personal responsiblity – on the first issue my answer is “dunno” and on the second it’s “dunno” or more properly – “why would I want to take responsibility for something I have no control of”.
For those contracting out through company pension schemes, there is no greater clarity. The Green Paper tells us that between 1997 and 2010 the percentage of jobs in the private sector carrying corporate pension sponsorship fell from 46% to 36%. It reminds us of the long-term decline in higher quality defined benefit pension provision but it does nothing to mitigate the requirement for companies and individuals who were previously contracted-out (and who will in future pay substantially more NICs).
As Government found when trying to force through a change in indexation (from RPI to CPI), occupational pension schemes are not flexible enough to change their constitutions to meet off the cuff changes in Government policy.
Most schemes will not be able to accommodate the dramatic changes in benefit structures required to contract-in. They will cease accruing benefits and hasten their chase to their inevitable conclusion – wind-up.
That is unless the Government makes some proper changes to the taxation, regulation and legislation surrounding occupational schemes. This is going to require an effort on behalf of Government rather greater than they have shown thus far int his consultation process. They need to look at ways at which schemes can alter the benefits they offer members , they need to relax the rules surrounding the paying of scheme pensions, they need to abolish the pernicious taxes introduced by the previous regime that restrict returns on equities and they need to find a way for companies to find it attractive to provide good quality pensions for their staff rather than simply complying with the Auto-Enrolment regulations.
If Government continues to disincentives occupational pensions from providing good quality pensions for their members (and companies to sponsor them) then the only lever left to Government will be to increase compulsory taxes to ensure full participation and adequate funding for private pensions and/or a much more substantive Universal State Pension.
- State pensions (bbc.co.uk)
- Many workers will not get £140 flat pension (telegraph.co.uk)
- Millions of workers to pay higher National Insurance to pay for pensions overhaul (telegraph.co.uk)
- Moving on..dealing with our DC legacy. (henrytapper.com)
- More than 1.5 million ‘lose out’ on universal state pension (telegraph.co.uk)
- New state pension to be announced (bbc.co.uk)
- Twelve million pensioners to lose out when credits are scrapped (independent.co.uk)
- Switch to flat rate state pension may damage private sector schemes (telegraph.co.uk)
- DWP outlines new direction for state pension payouts (moneydebtandcredit.com)
- New state pension ‘at least £155’ (bbc.co.uk)