The road to pensions simplification looks set to be a complicated one. But Chancellor George Osborne confirming in his Budget speech that the Government will be pressing ahead with a flat-rate pension, at least concerns that the policy initiative had run into the sand have been somewhat alleviated.
Osborne singled out pensions minister Steve Webb for praise for the work he has put in on driving the proposals, in his Buget statement quipping: “Such is the complexity of this means tested system, only someone like our Pensions Minister can work out exactly what someone’s entitled to – and what they need to save.
“So I can confirm that we will introduce a new single tier pension for future pensioners, set above the means test. This is currently estimated at around £140.”
The Chancellor’s statement is certainly a welcome one for anyone with even the slightest connection to auto-enrolment. Once it is implemented it will diminish one of the key arguments for opting out – that it does not pay to save.
“Pension saving is at an all time low and state pension reform is needed if we are to take steps towards ensuring we can cover the costs of our increased longevity,” says Baroness Greengross, chief executive of the International Longevity Centre-UK.
But the means-testing issue will not disappear altogether. Other benefits such as housing benefit and council tax benefit will still be means-tested. But the flat-rate pension will, provided it does make it to the statute book, remove an uncertainty for millions of auto-enrolment savers.
But experts are warning that serious hurdles remain to be overcome.
The chancellor’s statement is certainly a welcome one for anyone with even the slightest connection to auto-enrolment. Once it is implemented it will diminish one of the key arguments for opting out – that it does not pay to save
Mercer has warned that the proposals are a double-edged sword with winners and losers to emerge along the way. While the consultancy has welcomed the clarity ahead of auto-enrolment beginning later this year, it points out this simplification agenda is not without costs both to occupational pension schemes and employees.
Glyn Bradley, associate in Mercer’s Retirement Business in the UK, says: “This is unarguably going to be a simpler system than we have had in the past, and much easier for most people to understand. People need to take responsibility for their own retirement provision if they can, but they need a strong foundation to build on. We welcome the fact that this reform will help people understand what they can expect from the state and give them more confidence that their own savings won’t be means-tested away.
“Unfortunately, some of the simplicity promised is likely to be illusory, whilst improvements for some have to be paid for by others and two groups in particular, employers and employees. And the reform will kick away the financial support the Government has been giving to those employers still providing defined benefit schemes.”
This is because, since contracting-out of the additional state pension was introduced in 1978, employers and their employees have paid lower rates of national insurance.
“Sweeping this away will raise the NI bills of those employers, which will make them think twice about keeping their schemes open,” says Bradley. “Another massive disruption to defined benefit schemes is on the cards. As a result members’ benefit security will be reduced and there will be increasing reliance on personal saving and defined contribution arrangements.”
The second group paying for the costs of the proposals will be ordinary employees who would expect to remain in work and pay in full NI throughout their careers.
“£140 per week is a better prospect for those who would have struggled to pay insufficient NI,” says Dr Deborah Cooper, partner at Mercer. “But most people who worked throughout their careers and paid in their taxes could have expected to build up more. Many employees might find their take-home pay falling and without necessarily getting a better state pension. They will need to think about saving more if they want to target the pensions previous generations have received.”
What’s more, the move has the potential to further upset relations with the public sector.
Tom McPhail, head of pension policy at Hargreaves Lansdown, says: “This move heralds the next major battle between the Treasury and public sector unions. In order to deliver the reform, contracting out for final salary schemes will have to be scrapped. This in turn will lead to an increase in National Insurance rates of 1.4 per cent for members of contracted out occupational pension schemes, the vast majority of whom are employed in the public sector.”
Michael Johnson, of the Centre for Policy Studies, says: “Of the 7.5m people in contracted out pensions, 5.8m of them are in the public sector. Ending rebates creates shortfalls for both public sector employers and employees. The public sector will therefore suffer the biggest impact from the abolition of these rebates.”
But at least the Government now believes this is a battle it can win. Those desperate to see simplification ahead of auto-enrolment can take heart that the Treasury is now signed up to a flat-rate pension.