Consultation on the State Pension and the State Second PensionMonday, April 11th, 2011
Government proposes alternative ways of introducing a flat rate pension and a method of making future changes to the State Pension age.
In a new consultation document, the Department for Work and Pensions (DWP) presents new government proposals for
- speeding up the process of moving to a flat-rate state pension, and
- introducing a statutory mechanism for increasing the State Pension age in the future.
Flat-rate state pensions
Existing pension legislation makes provision for the introduction of a two-tier flat rate pension structure by the mid-2030s. As it stands, the existing State Pension would continue to be increased in line with the “triple guarantee” (the higher of earnings, prices and 2.5%). The State Second Pension (S2P) would continue to move gradually from an earnings-related pension to a flat-rate pension over a period of some 20 years. From 2012/13 the smaller of the two accrual components of the S2P becomes a fixed weekly accrual and, over the years, the proportion of the earnings-related component and the fixed-rate component will gradually reverse until accrual becomes entirely fixed rate. At that point, both the State Pension and the State Second Pension would both be flat rate. The original documentation also anticipated that contracting-out of the S2P would end altogether when this process is complete.
The two options presented in the consultation document for reforming the State Pension are:
- speeding up the transition to two-tier flat rate pension, and
- replacing the two-tier structure with a single-tier flat rate pension
Under the first option, the existing process would be accelerated so that the S2P would become entirely flat rate by 2020 instead of the mid-2030s. The State Pension and the S2P would continue to be separate pensions and contracting-out for defined benefits schemes would continue. The Pension Credit minimum income guarantee would continue to be a separate addition.
Under the second, more radical option, both State pensions and the Pension Credit would be combined into a single-tier pension and, as a result, contracting-out under the S2P would have to end.
Increasing the State Pension age
The State Pension age (SPa), which was age 65 for men and 60 for women up to 2010, is in the process of phased increases, which will see the SPa for women increase to 65 by late-2018, and the SPa for both men and women increase to 66 by April 2020. Further increases, which would increase the SPa to 68 by the mid-2040s, were enacted by the previous government and are still in legislation.
The two options for introducing a more automatic method of increasing the State Pension age are:
- using a formula that would automatically adjust the SPa in line with increases in life expectancy, and
- reviewing the SPa at defined intervals, with any adjustment based on an independent report covering the key factors around longevity.
The consultation period runs from 4 April to 24 June 2011