Latest Developments
On January 14, 2013 Minister for Pensions, Steve Webb MP, launched the Government’s White Paper on a Single-Tier State Pension. The Government subsequently published the draft Bill on State Pension reform, which will bring in the changes listed in the White Paper. Just before the release of the 2013 Budget the Government announced that the reforms would be implemented in April 2016.The Work and Pensions Select Committee undertook pre-legislative scrutiny of the draft Bill from January to March 2013 and released its final report on 4 April 2013. The Pensions Bill is expected to be introduced in parliament in summer 2013.
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.
As a result of the 2012 pension reforms millions of people will begin saving in a workplace pension for the first time over the next few years. 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.
The NAPF welcomes the Government’s White Paper on State Pension Reform and their intention to introduce a single-tier State Pension in the UK. The NAPF has been advocating for these changes for a number of years and will continue to respond to the Government’s work and consultation on changes to the state pension system over the coming months.
The NAPF’s Chief Executive, Joanne Segar’s, responded to the launch of the White Paper by stating,
“We welcome the Government’s strong commitment to radical change. This blueprint is a key step towards a system that will help people retire with confidence and dignity. The trade-off for working longer must be this better state pension, which will also treat women, the low-paid, and the self-employed more fairly.
“People like their pensions simple. This will set a clearer, fairer state pension that offers an easily-understood foundation on which they can plan their retirement. A flat rate system also dovetails with the recent auto-enrolment reforms by helping workers see what they need to save in their new workplace pension.
“The current state pension is unfair, complicated, and in desperate need of an overhaul. Its maze of payments and credits mean that even financial experts are often left wondering what they will get. With one in three babies born this year set to live to 100, the pension system has to work evolve.
“The NAPF has been campaigning for a flat rate state ‘foundation’ pension for years. This is the light at the end of the tunnel. However, these are complicated reforms that will mean big changes in the way many company pensions are run. We are glad that the Government recognises that challenge and is supportive of the need to manage the transition carefully.”
A Foundation Pension – NAPF’s view
In 2010, 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 will 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 from October 2012.
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 Department of Work and Pensions 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:
- Change their rules where it may be currently difficult to do so
- Allow for the recovery of the loss of the National Insurance rebate
- If you are a multi-employer scheme we would like to hear your thoughts on the override proposed by the Government.
- A strong communication strategy for 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 (single and multi-employer schemes). If you have any comments, questions or suggestions please contact Alizeh Hussan at: alizeh.hussain@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.