In light of calls for a pensions reform and the ongoing debate, the Pensions Policy Institute (PPI) has questioned the merits of a modernised contributory state pension against a universal pension based on citizenship.
A PPI paper, comparing the ‘contributory’ and 'universal' methods of determining eligibility for a State pension, finds the former to be only partially successful at meeting certain contributory objectives, namely ‘adequacy for all’ has been lost with 4.5 million people not accruing the right to the Basic State Pension each year.
Moreover, as a system rewarding work, the PPI believes this has become less true post-Serps, which provide more contributory pensions to people who have earned more. This feature is now being gradually withdrawn, it says.
PPI argues the idea for its successor, a State second pension (S2P), is to eventually work towards providing a flat-rate benefit, issuing the same pension to individuals of different earnings history with the same contribution record, meaning the contributory pension system will no longer reward high wages.
Its adversary, a universal pension, has varying ways in which it could operate.
The PPI says: “The basic objective of the citizenship or universal model is to give every person over State pension age who qualifies by a residency criterion the State pension benefit, emphasizing the ‘all’ in ‘adequacy for all’.”
With New Zealand often used as a comparative example as to how such a system might be applied to the UK, the PPI throws up several varying factors that need consideration, namely eligibility and how residency criterion would be defined.
Also, whether everyone gets the same level of benefit, or whether that should vary for example by marital status, along with how such a model would be paid for.
Alison O'Connell, director of the Pensions Policy Institute says: “Although the simplicity of the universal pension is appealing, there is a natural skepticism that transition will throw up unexpected problems, and the universal pension will not work exactly as intended either. The ‘devil we think we know’ is always the safe choice.”
O'Connell believes the universal pension can be at least as good as the contributory pension at adequacy and protecting ‘accrued rights’, adding its better equality for women and lowearners.
She points out however, the universal pension is not a reward for work as the contributory principle is.
Speaking at a recent PPIseminar, Labour MP Frank Field said: “The debate concerning a residency pension must be considered in the light of the recent London bombings, which may strengthen feelings both that citizenship needs careful definition, and that people should not get pension for nothing.”
He urged the government to find a long-term solution to pensions and put a 'shelf life' on Pension Credit in order to prevent the undermining of saving.
Peer Matthew Oakeshott, the Liberal Democrats spokesman on work and pensions, believes a residency-based pension is the only way to help many people get a fair deal from the system. He says such a system is safer, clearer and more reliable than the current contributory vehicle.
He argues for a state pension age commission to be set up to recommend future state pension ages, for example against a target of achieving an expected length of state pension payment of 25 years for people retiring in 25 years time.
This could have, say nine members, one appointed by each of the main political parties, the Government Actuary and five independent appointments, with the majority being women. This could provide a stable background for the consideration of state pension policy and also avoid total political interference.
A survey compiled by the National Association of Pension Funds (NAPF) in June , finds 56% of people are in favour of a universal state pension worth £109 a week, on the basis of citizenship as opposed to National Insurance contributions.
NAPF says half of working individuals feel a universal pension will encourage greater savings, as it provides them with a clear figure of how much to expect, while a further 42% of those questioned says it would encourage them to work beyond state pension age.
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