Income generated from auto-enrolment into workplace pensions will not offset low earners’ lost state pension until after two decades saving, suggesting most low and median earners with full work history will be worse off from the combined auto-enrolment and state pension reforms.
Figures the DWP sent to Corporate Adviser in 2011 show a low earner on £14,200 who has been employed most of his or her working life would have expected a state second pension of £2,444 a year if retiring in 2025, £2,860 a year retiring in 2035 and £3,380 a year in 2050 in today’s money.
Adding that to the £5,587.40 basic state pension gives combined state pension of £8,031.40, £8,447.40 and £8,967.40 for these three cohorts of low-paid workers, all of which are higher than the £7,488 a year flat rate pension.
Median earners on £25,800 retiring in 2025, 2035 and 2050 lose even more under the changes. They would have received state second pension of £3,900 £3,848 and £3,848 respectively, giving combined pension of £9,487.40, £9,435.40 and £9,435.40 respectively, and leaving them £1,999.40, £1,947.40 and £1,947.40 worse off.
Rowena Crawford, senior research economist at the Institute of Fiscal Studies says: “I have not checked these figures, but it is true that those who have spent the majority of their working lives since 2002 would be better off from the combination of Serps+S2P under the old system than the new system. Those reaching SPA in 2025 would have over 20 years of working life since 2002, and so a low earner with 10 years of just BSP accrual and 20 years of BSP+S2P accrual would prefer that to 35 years of flat rate accrual full – more years, but at a lower annual
accrual rate than BSP+S2P.
“Our analysis that says that younger people are main losers is based on exactly the above type of analysis. That people with large portions of working life post 2002 when S2P was introduced – and we could be talking about people born 1960s onwards here – would be worse off.”
The DWP said it was unable to give figures for the effect of the changes in state pension on specific cohorts until some time next week.
