The new regime is still likely to leave millions of pensioners in poverty and will certainly not bridge the gap to the most affluent
Pensions have for the moment largely slipped off the radar in the political debate. However, they received considerable attention under the former Coalition government and there was a sense that pensioners had often got a ‘good deal’ compared with other groups. Drawing on an article written for In Defence of Welfare 2, we consider here the extent to which the pension changes made under the Coalition government do or do not represent a more positive future for pensions.
Since its conception Beveridge’s blueprint for pensions has been built upon in piecemeal fashion by successive British governments, creating a complicated pension system with considerable uncertainty about what income people are likely to receive in retirement. Ultimately, these changes have failed to halt concerns about the future sustainability of the pension system, particularly in the context of hard-hitting media messages about ageing populations creating a ‘demographic time bomb’, the waning ability of people to remove the risk of poverty in retirement and the inadequate incentivisation of pension saving.
The Coalition government announced a number of measures designed to transform the pension landscape and reduce its complexity during its time in office. This largely involved implementing proposals made by the Pensions Commission and started by the preceding New Labour government, which obtained cross-party and stakeholder consensus. Changes included accelerating the rise in the State Pension Age (SPA) and reforming the indexation of the Basic State Pension (BSP) in order to halt the decline in its value. A ‘triple lock’ measure resulted in the BSP rising in line with the Consumer Price Index, earnings or 2.5%, whichever was the highest. The State Pension system will be substantially reformed, with the BSP and state second pension (S2P) replaced by a new Single-tier State Pension (STP) for those below the State Pension Age in 2016. The new STP will be set at approximately £151 per week (in 2015-16 prices), with 35 years of National Insurance (NI) contributions required to qualify for a full entitlement (an increase of 5 years, compared to the current BSP). It is claimed that the STP will eventually be easier to operate than the two–tier structure and could reduce the need for means-tested Pension Credit.
The introduction of the STP is intended to complement the expansion of private pensions by providing the foundation for auto-enrolment. The intention of auto-enrolment, phased in from 2012, has been to offer an occupational pension to people without access to good-quality workplace provision, while co-existing with the latter if they have benefits above the minimal National Employment Savings Trust (NEST) scheme. It is estimated that around 11 million people will be eligible, with six to nine million people newly saving or saving more. The logic behind auto-enrolment is that, while structured information may improve understanding, behavioural barriers, including myopia, cynicism and inertia, inhibit pension saving. The Coalition government also enabled flexibility in the way a Defined Contribution (DC) pension fund could be used from the age of 55, removing the requirement to annuitise 75%.
But what are the consequences of these measures? The accelerated rise in State Pension Age (SPA) means approximately 4.4 million people will have to wait up to a year longer for their state pension. This is on top of the gradual equalisation of women’s SPA. These rises will affect eligibility for the winter fuel allowance, concessionary travel and other age-related benefits. This may be particularly problematic for those who have already committed to work, saving and retirement decisions, and who may therefore struggle to adjust to delay in payment of the state pension. While the ‘triple lock’ measure is to be commended, use of the more realistic Retail Price Index, which reflects rising costs of essentials such as food and energy, would help the poorest pensioners.
In principle, the introduction of the STP is a welcome development for many low earners and for the self- employed. However, rather worryingly, the STP will only replace about 25% of national average wages. In the short term it may provide a stronger foundation than the current system for some individuals (although long-term prospects are less positive). Women will be less likely than men to receive the full amount, given their breaks in employment, if these do not all qualify for NI credits. There are also large numbers of men and women who are already retired or due to retire in the near future that will be excluded from the STP. The change to STP is expected to reduce pensioner poverty from its current rate of 11% to 10% by 2025. However, if the STP were available to all, including existing pensioners, this would reduce pensioner poverty further to 7%.
The introduction of auto-enrolment may increase numbers of lower earners saving into private pensions, but it is not without risks. All Defined Contribution (DC) schemes, including the government–sponsored NEST, individualise risk. Deciding whether to contribute to NEST or other schemes chosen by employers – which could be poorly managed or fraudulent – is a challenge, particularly given potential interaction with means-tested benefits. Free advice will be only generic. Many low to middle earners will lose out where employers reduce their pension contributions to minimum levels: about half the average made by employers who now operate a scheme. Employees earning below £10,000 pa are not auto-enrolled and those earning below £5,772 p.a. may opt into NESTs but, in so doing, will not attract an employer’s contribution. This may incentivise employers to keep wages low and restrict hours of work.
As in other private pensions, no credits are provided for periods of family care for children or parents. Alternatively a fully portable voluntary ‘pay-as-you-go scheme’, including carer credits as in state pensions, could be operated (with cross-subsidy or an Exchequer grant in lieu of tax relief), thus avoiding the penalty for caring years which is incurred in private pensions.
Guidance around pensions will also become more necessary due to changes in the way DC pension pots can be used. However, only £20 million has been allocated for a free independent guidance service. While choice may enable some people to use their pension pot more effectively, individuals will have increasingly complex decisions to make.
In sum, the impact of the Coalition government’s pension changes has surely been mixed. The STP will be easier to operate, but its level and inclusiveness need to be improved. Furthermore, the promotion of individual retirement provision through private pensions is likely to result in greater income inequality between older women and men and between those with intermittent or low-paid employment and those with an advantaged labour market history. While the new pension regime may eventually reduce complexity and encourage retirement saving, it will not reduce the gap between the poorest and the most affluent pensioners.