John Hutton, Secretary of State for Work and Pensions has admitted reforms to the State pension should try and stop the spread of mean-testing to allow people to save with confidence.
Speaking at the Institute for Public Policy Research (IPPR) on ‘The State and the individual: building a lasting pensions settlement’, Hutton said the means-tested Pensions Credit was acting as a disincentive to saving for middle earners, and added it should not “extend further up the income distribution”.
Commenting more on the Pensions Commission’s proposals for State reform, than private pension saving and the National Pension Savings Scheme (NPSS), Hutton said the idea of a “stronger State pension funded by some increase in the state pension age” and acting as a platform for new and low cost savings options, was “absolutely the right basis for the debate”.
Hutton also said to help the 10 million people not saving enough for their retirement a new deal has to be struck between the State and the individual which meets the Government’s five key tests of fairness, affordability, simplicity, sustainability and personal responsibility.
For this to happen Hutton says there needs to be a change in public attitudes and expectations, to make people understand there have to be trade-offs, which could mean working longer and saving more, along with realising “financial prosperity in retirement can not be delivered exclusively by the State.”
He added the Commission’s report identified two key roles for the state, that of a ‘provider’, funding a minimum income which no-one can fall below, while providing a platform to help build private savings, and secondly as an ‘enabler’, offering incentives and regulatory support for private savings.
Hutton again reiterated his belief a rise in the state pension age from 2020 was inevitable, but added affordability still remains the “critical test both for the period from 2010 to 2020 and in the longer term”.
He also criticised the Commission’s proposal for a universal residency based pension from 2010, to try and improve the pensions rights of women, with Hutton claiming there is a “critical group of women”, currently aged 45 and over who will receive virtually no immediate help from the introduction of such a pension in 2010.
By 2025, Hutton claims the current system will offer 80% of women a full basic state pension, which will only be improved by 5% if a residency pension is introduced, and by the time a virtually universal basic state pension comes into effect after 45 years, he claims the “critical group of women” will be almost completely missed.
Instead, the Secretary of State suggests the focus should be on developing a new contributory principle which gives women a fairer entitlement more quickly, but which could also reverse the projected decline in men’s pension entitlement, calling it a “classic win win for both men and women alike.”
Hutton also championed the introduction of a low cost savings vehicle such as the NPSS, claiming it to be a “key part of any long-term pensions solution”, adding Lord Turner’s proposals for an NPSS “still remains the one to beat”, although he was less confident on the idea of compulsion for employers.
He said the “question of whether to compel employers to contribute is a finely balanced one, especially when considering the potential impact on small businesses.”
But he did admit the State pension reforms needed to give people the confidence to save which means “they must therefore by definition, seek to halt the otherwise inevitable spread of means testing.”
Quoting research from the National Institute for Social and Economic Research commissioned by the Department for Work and Pensions (DWP), Hutton said although the Pensions Credit will still be an “important part of any future pensions settlement”, for many middle-income households it is a disincentive for saving and an extension of the system “was not expected to generate any further benefits”.
Hutton added: “We want future generations to aspire to saving for retirement incomes above the levels of means-testing and that means giving people confidence they are not going to have savings unfairly clawed back through means-tested benefits.”
Alasdair Buchanan, group head of communications at Scottish Life, says it is a positive move Hutton is focusing on the inequalities of the current system, as until the State system is sorted out the introduction of an NPSS or an alternative is just a side-show and should be treated as such instead of as the main event.
He adds: ”It’s welcome the Minister has recognised the problems of means-testing, but to suggest it is acceptable to hold it at the current level, and to suggest, like the Pensions Commission, it is safe for people to enter an NPSS type scheme with this in place is simply not true. This is a small step when we really need a much larger one.”
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