26 May 2006
The government this week published plans for the most radical overhaul of the UK pensions system since the introduction of the welfare state, proposing to make people work longer, save more and allow payments previously denied to millions of people.
Publishing his long-awaited pensions white paper on May 25, Work and Pensions Secretary John Hutton revealed a blueprint that could raise UK spending on state pensions from 6.3% of GDP to around 7.4% by 2050.
But to pay for it, people would be asked to wait for a minimum additional three years after 2040 before they could receive a state pension.
It would, supporters said, help to prevent a looming pensions crisis that emerged because between 7 and 10 million people were not saving enough for retirement.
Hutton has proposed:
- A phased increase in the basic state pension age from 65 to 68 after 2040 and payments linked to life expectancy thereafter
- Restoring the link between the basic state pension and earnings from 2012
- Measures to simplify basic pension payments through reduced means testing, including a flat-rate state second pension in future
- Setting up a National Pensions Savings Scheme into which employees will be automatically enrolled (and pay 3% of salary) and employers will be compelled to contribute (4%) to staff retirement pots; and
- Targeted payments for carers such as mothers, who have traditionally suffered from intermittent pension contributions.
Most of the proposals draw on recommendations made by Lord Adair Turner's Pensions Commission last year.
One Whitehall source said that, despite drawing heavily from Turner's report, the white paper was also the culmination of 'intense internal government discussions over the past few months'.
This was a thinly veiled reference to the recently resolved dispute between Prime Minister Tony Blair, who backed restoring the link between state pensions and earnings, and Chancellor Gordon Brown, who raised concerns over the cost of the package.
Trades Union Congress general secretary Brendan Barber described the white paper as 'the best opportunity to forge a new pensions consensus that we are likely to get'.
Despite losing the battle to retain a pension age of 65, Barber said the proposed deal was 'sensible' and 'sustainable'. 'It looks to be this government's historic third-term achievement,' he said.
In particular, Barber praised the 'help for women' offered by Hutton. The paper outlines specific payments to women who take time out of work to have children, and to carers. Both groups suffer high levels of pensioner poverty because of incomplete working records.
Hutton has proposed a large decrease in the number of working years required to qualify for a full state pension. For men the figure will fall from 44 years to 30, while for women it will fall from 39 years to 30.
A spokesman for the Conservative Party said that the government's proposals represented a 'stealth tax that would hit middle-income earners the hardest'.
Many middle-income earners could receive lower state second pension payments once the government opts for a flat-rate 'top-up', without a subsequent reduction in National Insurance contributions.
But a Department for Work and Pensions spokesman said that argument 'failed to recognise that all citizens would be eligible for higher basic state payments in future'.
The Liberal Democrats, meanwhile, claimed that the proposals 'fail to address the basic deficiencies in the state pension architecture, leaving in place a system which is still too complex, too means-tested and does too little to encourage savings'.
Despite government attempts to simplify the system, a LibDem briefing paper claims large numbers of people would still face means testing. Benefits experts believe this acts as a disincentive to claim among vulnerable groups.
Amid concerns that a state pension age of 68 would be in sharp contrast to the public sector pension age of 60 upheld in last year's deal with trade unions, the LibDems also called for an independent review of public sector pensions.
The editorial director at the Institute of Economic Affairs, Philip Booth, told Public Finance that the deal with the trade unions, which allows public sector staff enrolled in schemes by 2006 to retire at 60, 'would cost taxpayers £1bn per month from 2013'.
In what has been viewed as a pacifier for the financial services industry, Hutton recommended further consultation on the structure of the National Pensions Savings Scheme.
He has suggested two alternatives: Turner's proposed model, which would allow a single organisation to manage all pension accounts; and a system favoured by the Association of British Insurers with a number of private providers offering accounts.
However, a senior DWP source told Public Finance: 'We are clear that Lord Turner's lower-cost proposal remains the one to beat.'
A final decision will be made later this year.
PFmay2006
