Tuesday, 22 April 2014




Everything is changing in the world of pensions. The state scheme is being turned upside down, occupational schemes are being revised and following the Budget a few weeks ago private personal pensions are now going to be radically altered.

For decades the UK pension system has largely been built on two pillars:

1. A low state pension topped up by means-tested benefits

2. Decent occupational pensions based on final salary pay outs

But this policy has been unravelling for years.

The OECD says that our state pension system is the least adequate in the developed world, second only to Mexico. This means the gap between wages in Britain and the state pension is almost the widest amongst 37 developed countries.

Around 1 in 5 older people live below the official poverty line of around £175 a week (before housing costs) and the vast majority of those are older women in their late 70s and over who don’t have decent pensions of their own and have to rely on their husband’s contributions. Many paid the lower married women’s stamp, or worked inside the home or were in part time jobs. The fact of the matter is that low pay will equal low pensions.

As a result of this neglect of the state system, around 4 million older people are eligible for means-tested support through the Pension Credit but around 1.8 million don’t come forward to make a claim.

So the state system clearly isn’t working.

On occupational pensions most people recognise that final salary schemes no longer exist for new starters. Around 8 million low paid workers are being encouraged by the government, TUC and employers to go into auto-enrolment paying 4% of their salary into a savings scheme that cannot guarantee how much they will get at the end of their working lives.

They will be paying in for at least 35 years – giving £10bn every year to the private pensions industry long before they have to pay out. Imagine if that money (not just from those 8m but all workers and their employers) was coming into a state scheme and how it could be used to fund public works such as housing, job creation and better public services.

You see the government say pensions are too complicated and that’s why low paid people don’t save. I think it’s more likely that at the end of the month they simply don’t have anything left to put aside. How can someone on a zero-hour contract have a pension when they don’t even know how much they will earn each week?

And then in the Budget a few weeks ago the Chancellor announced that he was effectively calling time on the busted annuities market and would allow people to cash in their pension pots in full rather than pay for a regular monthly income. Pensions minister Steve Webb said he was very relaxed with the idea that pensioners could take all their money out and spend it all on a brand new Lamborghini. What he didn’t say was that the latest model costs £165,000 - whereas the average lifetime pension pot is more likely to be between £35,000 -£40,000.

He also didn’t mention that if you did cash in your pension that money would be taken into account if you needed to be assessed for social care either at home or in a care home. If that money was more than certain thresholds, the individual may not be eligible for state assistance with the costs of that care.

We know that on coming to power the Coalition weakened pensions overnight by introducing the lower CPI (Consumer Price Index) figure rather than maintaining the RPI (Retail Price Index). But they are going further…

The single-tier state pension proposal as contained in the Pension Bill is now awaiting Royal Assent and has largely been passed through Parliament without any serious opposition.

From 6 April 2016 those with 35 years’ worth of National Insurance contributions/credits will get a pension around £150 a week. This is a combined payment of the basic and second state pensions (SERPS, Graduated Pension, S2P). If you’ve built up an entitlement to more than the £150 figure you will keep it, but those who start work after 2016 will only ever get that amount (plus indexation).

The state second pension will be abolished and employees who are currently contracted-out will have to start paying more NI – 1.4% for employees and 3.4% for employers. Private sector employers will be given a 5 year period when they can alter the terms of their pension schemes without the consent of the trustees in order to make up that extra money that they will have to pay out in additional NI. They will do this is one of two ways: either by reducing pension pay outs or by increasing contributions from staff.

In the public sector the extra NI will have to come out of existing budgets and whilst employers will not be able to alter the terms of their pension schemes, savings will have to be found in the form of job cuts or pay freezes.

There is also a proposal to raise the retirement age to 67 by 2028 and 68 by 2036. After that the government wishes to review the state pension age every 5 years, but there is no recognition that longevity is linked to class, income, social status, occupation and geography. All the evidence shows that the poorer you are the shorter your life will be. So raising the state pension age is an attack on the working class.

And finally there’s the link between this proposal and auto-enrolment. Is it a coincidence that the single-tier state pension has been set as £1 above the current means-tested Pension Credit? The Government recognised that there was a problem: how can you get low paid workers to put money into an auto-enrolment scheme if when that was added to their state pension it was still less than means-tested benefits? You have to remove the availability of benefits to show that saving is worthwhile.

So our entire state pension policy is being driven by the need to make the private pensions industry work – rather than seriously improving the state system.

What are the implications then of the new single-tier state pension?

The government called it a simplification but we will effectively be running a two-tier pension system, for those currently retired and those newly retired after 2016 for about 60 years. There is a possibility that over time the gap between the level of the old pension and the new pension will widen, as indexation arrangements could be different and politicians lose interest in doing anything to improve the old scheme. Existing pensioners who don’t currently get £150 a week should therefore be included in the new arrangements.

The existing pension scheme also requires 30 years’ worth of NI contributions to qualify for a full state pension. Before 2010 30 years would have only got you 30/39ths for a woman, between 2010 and 2016 it will get you a full pension and after 2016 it will only get you 30/35ths. In the space of just 7 years, three people all with 30 years’ worth of NI contributions will be getting different levels of pension.

It therefore highlights how this reform is being introduced before existing reforms have taken place. The key area here is the women’s retirement age – which was due to reach 65 in 2020 – now 2018 – but is still two years after this new proposal comes into force. It means that those born in the early 1950s are finding out they have to work much longer than they previously thought.

Government figures also show that the new scheme will cost less by 2050 as a proportion of GDP than the existing system – and we know that that isn’t very generous anyway. The IFS (Institute for Fiscal Studies) says anyone born after 1970 will be worse off under the new system.

The government also recognises the problem with excluding existing pensioners from the scheme. So they intend to allow anyone to top up their state pension if they don’t have enough years of contributions. Figures released last week show a 65 year old would need to live just over 17 years to get more money back than it cost – and for a 75 year old 12 years. Given that the average ages are 79 for a man and 82 for a woman it’s a hell of a gamble.

Some might argue the whole drift of pensions policy is to make people contribute more and for longer in the hope that they never get enough time in which to draw it out. What we are seeing is the systematic weakening of the pension system in the UK. Shifting risk further onto the individual and away from the state and the employer, and the burden largely falls on future generations who will be worse off than their parents and grandparents.

That is why we need, more than ever before, a decent basic state pension set above the poverty level and paid to everyone – including women who don’t have enough NI contributions, a state second pension that is reinvigorated rather than auto-enrolment, proper indexation using RPI again rather than CPI and an end to the rise in the state pension age.

It’s a challenge, but one which retired members can take on – raising the issue with working members on why we need a decent state pension and why unions and the NPC should do more campaigning together in order to achieve it.

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