State Pension Reform

Latest Developments

In his speech to the Conservative Party Conference in early October 2011, the Secretary of State for Work and Pensions Iain Duncan Smith confirmed that the Coalition Government plans to go ahead with “bold state pension reform. A Single Tier would end means testing, to increase income for many more, especially women and those who are self-employed.”

State Pension Reform

The NAPF has long argued for radical reform of the UK’s state pension system. We believe the State Pension system has a key role to play in providing an adequate retirement income for pensioners and in providing a solid foundation on which to base private pension saving. Next year, millions of people will begin saving in a workplace pension for the first time. The introduction of automatic enrolment from October 2012 is one of the biggest reforms to UK pensions in decades. To ensure the success of auto-enrolment, it is imperative that the state pension system is reformed in an equally radical way.

Last year, the Coalition Government committed to restore the link between earnings and the Basic State Pension from April 2011 and to introduce the “triple lock”. The introduction of the triple lock is an important first step in maintaining the value of the state pension system, but in our view this does not go far enough.  We have one of the lowest state pensions in the developed world and, as the Pensions Commission acknowledged, it is also one of the most complicated.  Currently, around half (45%) of pensioners need some form of means tested benefit to support their income.[1] According to the OECD, the gross replacement rate for a median earner in the UK is just 37% compared with the OECD average of 60%.[2]

A Foundation Pension – NAPF’s view

Last year, the NAPF published proposals to combine the Basic State Pension and State Second Pension into a simple, more generous Foundation Pension. The introduction of a single, more generous Foundation Pension coupled with innovations in workplace pensions would significantly increase the size of individuals’ pension pots and would provide a powerful incentive to people by ensuring that it pays to save for their own retirement. Without radical reform, even after the introduction of auto-enrolment, the current system would continue to deliver inadequate incomes—especially for those on low to median incomes where the value of their savings are eroded away by means tested benefits. The introduction of the Pension Credit fulfilled its purpose by lifting 900,000 pensioners out of poverty since 1998[3]. However, the political debate has moved on considerably, especially given the current pressures on Government spending. The gap between the level of the Basic State Pension and the Pension Credit has continued to widen. High levels of eligibility to means tested benefits simply do not chime with the Government’s objectives of encouraging personal responsibility, especially with the introduction of auto-enrolment scheduled for 2012. 

A Foundation Pension for all   The Foundation Pension, as proposed by the NAPF in Fit for the Future: NAPF’s Vision for Pensions, has the following characteristics: The Foundation Pension would combine the current Basic State Pension and State Second Pension to form a single, flat-rate benefit. The Foundation Pension level would be set above means tested benefit levels. A full Foundation Pension would be earned after 30 years of National Insurance contributions. It would be paid on an individual basis to people over State Pension Age. Once in payment, it would increase annually in line with the triple guarantee.

Ending DB contracting out

One of the implications of combining the Basic State Pension and the State Second Pension is that DB contracting out would have to end. Although the ending of DB contracting out will be extremely complex, schemes do have options when it comes to responding to the changes. The NAPF is working closely with the DWP to ensure that schemes are able to make changes to their benefits in sensible and easy-to-manage ways.

There are ways the Government can help to make the ending of contracting out easier for schemes to handle. We have called on the Government to provide:

• A reasonable timetable for implementing the changes. We think schemes and employers need at least 5 years notice to prepare.
• A statutory override for schemes to:
• Remove the current consultation requirements which are often lengthy and expensive. Schemes may still want to consult, albeit in different ways.
• To allow schemes to change their rules where is it is currently not possible. We have been arguing strongly for a statutory override for schemes.
• Joined up communications with employers and schemes in the private sector
• Fair transitional arrangements for individuals

Have your say

The NAPF wants to hear what you think about state pension reforms and how the potential ending of DB contracting out could be made easier for schemes. If you have any comments, questions or suggestions please contact Catherine Cunningham on Catherine.Cunningham@napf.co.uk.

Further Information

For more information about how the Government plans to reform the state pension system, please visit the DWP’s website.

[1] DWP, A State Pension System for the 21st Century, 2011.
[2] OECD, Pensions at a Glance, 2011.
[3] Work and Pensions Select Committee, Tackling Pensioner Poverty: Fifth Report from the Committee, 2008-9 Session.