MPs have slammed the Department for Work and Pensions communication of the new state pension, branding it as confusing, lacking in clarity and creating misunderstanding.
The DWP select committee has also called for the term ‘Contracted Out Pension Equivalent’ to be replaced with ‘contracting out deduction’.
MPs leading the inquiry into understanding of the new state pension are so concerned about misinterpretation attributable to confusing state pension statements that they have issued an urgent interim report to highlight that DWP statements are insufficiently clear at a crucial time for the reforms. The committee says this lack of clarity increases the chances that people misunderstand the value of their state pension or the age from which they will receive it. In turn, this increases the chances that they will not best plan for retirement, the committee of MPs says.
In November 2015 the DWP introduced ‘Contracted Out Pension Equivalent’ (COPE) in statements for people who have been contracted out. The COPE is intended to give people an indication of the state pension foregone through contracting out. The Association of British Insurers (ABI) told the committee that people may wrongly believe that they will receive an amount equal to the COPE from their private pension. This increased the risk that people will have unrealistic expectations of their private pension entitlement. The Pensions and Lifetime Savings Association told us that the term ‘contracted out deduction’, which had been used in the past, was more accurate and should be explained as a reduction applied to the NSP to reflect periods when the individual and their employer paid less NI.
Hymans Robertson partner Chris Noon says: “We agree with the Work and Pensions Select Committee that the While the Single Tier pension will go some way towards simplifying a complex system the transition throws up a number of anomalies. Working out who the winners and losers are is incredibly complicated. Individuals will not be able to work out their starting amount – they will need to be told.
“Today’s interim report focusses on the communications to those approaching retirement. While we welcome the sense of urgency it creates in dealing with the issues for those approaching retirement, we also hope that the full report looks at how the new State pension is being communicated to the whole workforce – not just those approaching retirement. This is because the majority will receive less State pension in the new regime than they would have done in the old.”
Hargreaves Lansdown head of retirement policy Tom McPhail says: “Successive governments have given inadequate consideration to the impact of these changes on individuals and how they should be communicated. Even now, just a few months before its launch, the present government is scrambling to get its New State Pension statements fit for purpose. They have had years to prepare, in some cases decades. This poor decision making and complacency regarding the importance of good communication, have undermined what were fundamentally good policies.
“It is also now leading to calls, very late in the day for some aspects of the policy changes such as the state pension age increases for some women to be revisited; these should all have been properly dealt with years ago.”
Barnett Waddingham senior consultant Malcolm McLean says: “Clearly there have been failings of communication especially in regard to changes in women’s state pension ages which ultimately the DWP may have to concede and provide some form of compensation for those worst affected by them.
“In relation to individual entitlements, however, there is no doubt that expectations were falsely raised in the early announcements about the new “more generous, flat-rate pension” which could not be fulfilled against a backcloth of the no overall extra cost requirement stipulated by the Treasury. This meant there had to be losers as well as winners and gave rise to incredibly complicated transitional arrangements to take account of past accrued rights to Serps and deductions for former contracting-out rebates.
“This all added up to a considerable communication challenge for DWP which in the Committee’s view they have seemingly failed to rise up to and which now at the eleventh hour they urgently need to address.”
Recommendations from the committee
- statements should be limited to one page in length;
- key messages should be highlighted in boxes to ensure they stand out clearly;
- statements should prioritise the current value of state pension built up, state pension age, the date that age will be reached, and how to build up additional benefits;
- state pension age should be highlighted in a prominent position, especially for those whose pension age has changed;
- means of getting further information, such as a full breakdown of NI history, details and calculations of NSP starting amounts, and calculations of deductions for period of contracting out should be clear and that information should be readily available;
- the term ‘Contracted Out Pension Equivalent’ should be replaced by ‘contracting out deduction’; and
- the contracting out deduction should be explained as such, making it clear that it is a reduced state pensions as a consequence of paying reduced NI contributions but may be compensated for by the individual’s private pension scheme.