The RP Team analyses the consequences of the publication of the long-awaited single-tier state pension white paper
On Monday 14 January, the government finally published its white paper on the future of the state pension, outlining its plans for a single, universal benefit to replace the multi-layered current system.
The single-tier amount will be set above the basic level of means tested support, which is the pension credit standard minimum guarantee, currently £142.90 per week, and uprated under the provisions of the triple lock.
Launching the white paper in Parliament, pensions minister Steve Webb said: "The workers of today will retire on a single, simple, decent model", which is "very much in line with" the principles of the Beveridge Report.
However, as with all government reforms, there will be winners and losers.
Contracting out gave the Department for Work and Pensions major headaches during the drafting of this paper.
The DWP has now proposed to abolish contracting out as originally intended. In a move not expected by many commentators, the DWP said employers will have temporary powers to change scheme rules without trustee consent, to protect defined benefit schemes from the cost of abolishing contracting out.
The white paper anticipated employers will have to pay an extra 3.4% of relevant earnings for every contracted-out employee, while employees currently contracted out could see an increase of 1.4% in their national insurance contributions. Workers could also see their scheme benefits reduce or contributions rise.
The DWP said employers may wish to reduce future pension benefits or increasing employee contributions to offset the rise in NI contributions but could be prevented by trustees.
"The government therefore proposes to give employers powers to change scheme rules for this purpose, without trustee consent," the paper said. However, this power will be only temporary, according to the DWP.
Managing the transition
To end S2P, the government was forced to come up with a way to neutralise the cost and complexity of extra entitlements without disregarding extra rights already built up under the old system.
The DWP has proposed that each individual's current National Insurance record will be used to determine a single ‘foundation amount' on which their new entitlement will be based.
As a safeguard, the DWP will check that the rules under the old system do not give a better outcome, and if they would, an individual's foundation amount would be increased.
The government has proposed to place individuals into four groups:
• Individuals with a foundation amount that is equal to the full level of the single-tier pension, who will not present a problem.
• Individuals with a foundation amount that is less than the full level of the single-tier pension, who will be able to increase their single-tier pension up to the full level, at the rate of 1/35th of the full rate (£4.11 to the nearest penny) for each additional qualifying year they gain before reaching their state pension age.
• Individuals with a foundation amount which is more than the full level of the single-tier pension, who will receive the difference between their foundation amount and the full single-tier amount as an extra payment on top of the full single-tier weekly amount.
• Individuals with no pre-implementation National Insurance record, who will receive better long-term clarity of outcome, and will be supported through auto-enrolment.
The government will review the state pension age every five years to keep the retirement age in line with increases in longevity.
Reviews will be conducted by an independent panel with a minimum of ten years' notice for any change. The report also said any change will be made with reference to maintaining the proportion of adult life spent in receipt of state pension.
In addition, the DWP said people must work longer for their full entitlement, setting a minimum of 35 years of National Insurance contributions to qualify. This is five years longer than the current requirement, but is lower than the 44 years for men and 39 years for women required before 2010.
The paper also proposes a requirement for people to have been in employment for a minimum period of between seven and ten years to qualify.
The overhaul will save the government money in the long term, the DWP said.
The department predicted the annual cost of the new system would mirror that of the current system until 2050. After this point the cost of the two systems begins to diverge with the flat-rate pension projected to cost 8.1% of GDP by 2060, compared with 8.5% if the current system was rolled forward.
A key requirement of the proposals was that they should not cost more than the current arrangements in any year.
Webb said a more detailed breakdown of the costs would be included in a bill expected to be laid before Parliament.
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