When the Daily Mail broke news of the Department for Work and Pensions’ plan to introduce a flat rate pension of around £140 a week last October, it clearly caught the government on the hop.
Fast forward almost six months and pension minister Steve Webb’s Green Paper ’A Simpler Pension for the 21st Century’ has set out parameters for change that are undoubtedly wide-reaching.
But by including two options for reforming state pension, Webb has mystified many in the industry. Option two, a single-tier flat-rate pension above the Pension Credit standard minimum guarantee was what everyone in the industry thought the green paper was all about. The first option, on the other hand, that of speeding up the transition to a flat-rate two-tier pension, is not what was expected, and if the government goes for this one, the whole process will look like a damp squib.
“Whilst the headlines have been eye-catching, the Government has left the green paper very open and it is unclear at this stage which approach it will favour. The first approach could be just tinkering around the edges, whereas the second would see one of the biggest shake-ups in state pension provision and trustees and sponsors should be aware that this proposal would lead to the end of contracting out for DB schemes,” says a spokesman for Punter Southall.
That threat to contracting out, which by definition makes the option a serious threat to DB pensions themselves, could be the reason why the less challenging proposal has been brought in. If the government is seen to impose a solution that will put yet more of nails in the coffin of DB without consultation, it will take the political flak.
If the Government is seen to impose a solution that will put yet more of nails in the coffin of DB without consultation, it will take the political flak
For Bob Scott, senior partner at LCP, the consequences are clear. He says: “The move to a flat rate state pension, and therefore the abolition of the state second pension will lead to the end of contracting out for DB schemes.
“A higher flat-rate pension will be seen as good news in the long term but, unless employers make further changes to their DB schemes, they will face extra costs and scheme members will see their pay-packets hit with extra tax / NI charges. In total, these amount to 5.3 per cent of relevant salaries, or around £105 a month for someone on average earnings.
Assuming that option two is the government’s target, there is still a lot of politics to be worked through before we get there. Rachel Reeves, Labour’s pension shadow has raised the issue of the future of passported benefits including cold weather payments and council tax support within the proposals, calling on the government to guarantee that the poorest pensioners will still receive these.
Wrapping cold weather payments into a flat-rate pension may make sense to anybody in the industry, but the politics of doing so is not so straightforward. The often contrary reactions of the general public to policies that are generally benign was demonstrated in the response to the original Daily Mail story about the £140 a week pension within a few hours of the story going on the newspaper’s website there were over 500 comments, mainly from pensioners angry they were losing out.
Association of Consulting Actuaries chairman Stuart Southall has joined in the criticism, launching a blistering attack on the Coalition’s lack of progress on occupational pensions. Southall has pointed out that at paragraph 101 of the Green Paper the Government states that it sees auto-enrolment as a delivery on its commitment to ’reinvigorate private pension provision’.
Southall says: “The Coalition Agreement commitment was actually to ’simplify the rules and regulations…to help reinvigorate occupational pensions’, but what we have so far is nothing to do with reinvigoration however it might be spun only about the extension of quasi-compulsory savings and a future reduction of State benefit dependency.
“The latest threat of ending DB contracting-out as an inevitable consequence of State pension simplification gives private sector employers yet another valid reason to review, and to perhaps radically redesign, their pension offerings.
“A frank observer would struggle to see a proper understanding, or indeed spirit, of reinvigoration in any or all of the following the high earner tax changes, even accepting the fiscal imperative; the mis-handling of the RPI to CPI changes, particularly in respect of private schemes; the DWP’s revelatory moment that GMPs must now be “sex equalised” but in the absence of any robust European precedent or test case; and the perpetuation of a bipolar regulatory world in which risk-sharing is discouraged by the mass of costly and over-protective regulation that now applies to the UK’s ring-fenced DB legacy.”
The Coalition may have done a lot in a short space of time, but many argue there is a lot further to go.
