There is no evidence that the new state pension has achieved one of its primary aims of providing a system people understand, a National Audit Office report has found.
The Pension Bill 2014 described the new system as bring introduced to ‘deliver a simple state pension system for future pensioners that will provide people with clarity and confidence to better support saving for retirement’. But an NAO report has found just 18 per cent of working age people know how much they can expect from the new state pension, and fewer than half of people within 10 years of their state pension age knew what their state pension is likely to be.
The NAO report says “it is not yet clear whether the simplified system will improve understanding of retirement savings’.
The report also found that the DWP’s objective of prompting people to take action and plan for their retirement from a younger age has not been achieved. The NAO says: “There is no evidence yet that the new state pension has encouraged people to save more for their retirement. The Department recognised that the campaign on its own was unlikely to shift behaviours substantially in the short term. Its approach to changing behaviours largely relies on the success of automatic enrolment in increasing savings, rather than on simplifying the state pension.”
The NAO report into the introduction of the new state pension found 2.1m people have checked their state pension forecast since 2014 and 77 per cent of people within 10 years of state pension age are aware of the state pension changes.
The report highlights a 0.5 per cent of GDP reduction in spending on state pension and pensioner benefits in 2016, with 76 per cent of those reaching state pension age in 2016 worse off under the new regime, compared to 73 per cent of those reaching SPA in 2030 being better off.
Those better off include almost all those with final salary benefits and contracted out personal pensions, as well as the self-employed and some cohorts of women. All people in the auto-enrolment target market who have full working lives, because they have little or no pension savings – the group who were contracted into state second pension under the outgoing regime – are worse off under the new system from this year. Loss of GMP indexation will also cause some groups to lose out, and some women will face sudden increases in state pension age as a result of the combined effect of equalisation with men plus across the board state pension age increases.
In response to a report by the Work and Pensions Committee, the Department will write to over 100,000 people who are unlikely to reach the minimum number of qualifying years. However, it rejected calls to write to other groups likely to lose out because it could not accurately identify the people affected and did not think contacting people directly was an effective approach. Instead, it sought to reach these groups through its communications campaign. Our recent report highlighted a lack of clear information for people with guaranteed minimum pensions, and that it has been difficult for them to find information on how the reforms affect them
The NAO also found widespread misconceptions as to what people will get, with about 60 per cent of people thinking that if someone retires after April 2016, having worked for 35 years or more, they will always get the full amount of state pension. The amount they receive will in reality depend on their National Insurance record, taking account of any periods when they were contracted-out.
Barnett Waddingham senior consultant Malcolm McLean says: “The NAO Report suggests that DWP’s attempts to improve people’s understanding of their state pension have had only limited success.
“Communicating the changes was always going to be a challenge given the complexity of the transitional arrangements for moving from the old system to the new, notably in relation to the deductions that had to be made to the starting level of the new pension to take account of NI reductions and rebates for past periods of contracting-out of SERPS.
“Peoples’ expectations were initially incorrectly raised by talk of a new “simpler, flat-rate, more generous” state pension, none of which in the early years is likely to be the case. In fact it is now estimated that roughly one and a half million individuals who will reach state pension age in the next ten years will get less than the full rate, currently £155.65 a week, even if they have the full 35 years or more NI contributions. Subsequent communications from the DWP purporting to explain the contracting-out deduction were also often too technically oriented and may not have always resonated.
“The NAO’s comment that it is not yet clear whether the simplification of the state pension will support wider pension reforms and encourage people to save more for their retirement is also of note. The constant pushing-back of the state pension age makes retirement a distant dream for today’s younger generation and the prospect of a simpler, albeit for most by 2060 less generous, state pension is unlikely to alter that. Also the gap between the levels of the full new state pension (£155.65 a week) and the Pension Credit threshold (£155.60) is so marginal that it calls into question the claim that the new pension would provide a foundation for private saving without the worry of overlaps with means-tested benefits. That has plainly yet be achieved on the basis of current rates.”