Everyone agrees pensions reform should produce a system that's fair for everyone. But what is fair? And could the reforms unintentionally lead to some unfair outcomes?
These thoughts were prompted by case studies prepared for Scottish Widows by the Pensions Policy Institute (PPI).
These found that a median-earning woman who contributed at the basic rate into a personal account from age 22 until retirement could receive only 69% as much pension as an equivalent male. Is that fair?
The difference arises partly because women receive lower annuity rates than men because they live for longer on average. Their monthly pension income is lower, but on average they get it for longer. Is that fair?
More significantly, median female earnings are much lower than male. The government’s Annual Survey of Hours & Earnings found that the median female income was £387 a week in April 2006, compared with £487 for males.
These days men and women doing the same job should receive equivalent pay, but there may still be some bias in filling vacancies for senior jobs and women who take a career break can lose out in personal development and experience.
But salary differences may result largely from the kind of jobs men and women tend to choose. I’m an actuary and my wife’s a physiotherapist. We could have an interesting debate about who contributes more to our society, but there’s no doubt who earns more. Is that fair?
I’m sure the male/female divide will continue to exercise minds for years to come, and at least the government has taken steps to address gender inequalities in state pensions.
However, there’s one other area of pensions reform where well-intentioned change has produced a serious unintended consequence. That’s in means-tested benefits for self-employed people.
The government is rightly trying to reduce the number of people who need to apply for extra income under the Pensions Credit system. One measure it’s taking is to introduce a gap between the level of the Basic State Pension and the minimum threshold for the Savings Credit.
Every £1 of personal income above this threshold reduces means-tested benefits by 40p, but below the threshold it’s pound-for-pound. The government is relatively relaxed about this because, in the long term, most employees will have enough State Second Pension (S2P) entitlement to take them clear of means-testing. But self-employed people don’t qualify for S2P, so they’ll suffer the pound-for-pound reduction.
It’s easy to construct an example where a self-employed person saves regularly for many years and builds up a fund that’s above the trivial commutation limit, only to discover that all the resulting income simply reduces the State top-up pound-for-pound. That’s not fair.
Ian Naismith is head of pensions market development at Scottish Widows.
The views expressed are those of the author and not those of the company he represents.IFAonline
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