State Pension Reform

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In the 2011 Budget, the Government expressed the view that the State Pension system is too complex, making it difficult for working-age individuals to determine what they might receive from the State, in particular from the State Second Pension.

Subsequently, in April 2011, the Department for Work and Pensions (DWP) published a consultation document presenting two Government options for reforming the State Pension system:

1. speeding up the transition to two-tier flat rate pension, and
2. 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.

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.

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.

The Government published its summary of responses document in July 2011.  Pensions Minister Steve Webb said at the time that the document was not a Government response, merely a summary of the responses that had been received.  There was no mention of what steps, if any, the Government would take next.

In February 2012, Mr Webb made the following written response to a question posed by Labour MP Yasmin Qureshi:

‘In April 2011 the Government published a consultation paper on state pension reform that set out two alternative options to a simpler, fairer state pension system that better supports saving for retirement. Over three quarters of organisations who responded to the consultation supported the single tier pension in principle. Following the consultation the Government are continuing to develop their proposals. Should we decide to proceed with reform we will publish a White Paper impact assessment as part of the usual process.’

Comment

It is good to know that these reforms are being developed, however, it is better to know that there is no news at the moment!  We all have plenty of other things to be getting on with.

Further Information

• DWP  – A State Pension for the 21^st Century
• DWP – A State Pension for the 21^st Century – summary of responses

Tags: DWP, Pension Credit, S2P, state pension reform, Steve Webb

This entry was posted on Sunday, February 26th, 2012 at 12:23 and is filed under Pensions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.