The government is thinking of replacing the State Second Pension with fixed rate accruals from as early as 2012.
Speaking at the launch of a summary of responses to the pensions white paper hosted by the Social Market Foundation, James Purnell, minister for pensions reform, says the government has recognised the system put forward in the white paper “could do with further simplification”.
As a result it is “exploring” the possibility of replacing the accruals-related element of the S2P with a fixed rate, of around £1.40 a week for each qualifying year, at the same time as it re-links the basic state pension to the rise in average earnings.
Purnell says the S2P is currently calculated in a very complex way but is essentially related to earnings, so white paper proposals are intended to phase out this residual earnings-related element by 2030.
However, he says by setting a fixed amount for accruals, rather than something which can vary from £1.20 to £1.55 a week, it makes the S2P much clearer and gives people a picture of what they will receive from the State.
He argues for most people the new system would effectively operate as a single state pension which would be more valuable for all pensioners than the current system.
Purnell suggests the top-up of the S2P could be initially set at £1.40 but would be re-valued each year by the member’s earnings in accrual, then once it is in payment it would continue to be up-rated in line with prices.
However Jeanie Drake, a member of the Pensions Commission, expressed some concerns about the proposals by pointing out any timetable for flat-rating the S2P would have to make sure the mechanisms for personal accounts would be in place and successful.
She argues many low to moderate earners in the target group of personal accounts could be left worse off over the long-term if the acceleration of phasing-out S2P is too rapid.
Purnell denied this would happen as he says under the proposals, which would fall within the costings made in the white paper, the earnings-related section would remain in place for those earning over £12,000 until 2030 as originally stated in May.
Instead, he says the proposals would simply mean instead of a varying accrual rate everybody would get the same from 2012, or when the BSP is re-linked to earnings, and by the time the earnings related element is phased out in 2030, it should also have reached the level of around £1.40 a week, so the top-up level can continue at that rate.
More specifically, he suggests if the government does decide to go down this route, it is looking for feedback from the industry as to whether the two pensions should be merged, or whether it will be unnecessary, as it will effectively be a single tier pension but without the problems which make a Citizen’s Pension “unattractive” to government”.
In response, David Laws, shadow secretary of state for work and pensions for the Liberal Democrats, says: "The Government is still struggling to provide a pensions system which will be understood by anybody. Further tinkering with a state second pension, which nobody understands in the first place, is not the answer."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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