03 November 2006
Pensions minister James Purnell this week floated a 'radical simplification' of the state second pension – and claimed that the cost would not breach the financial 'cap' proposed by the Pensions Commission last year.
The Department for Work and Pensions published its response to the pensions green paper consultation on October 30. It formalises two main government reforms: moves towards a flat-rate second pension and a devolved agency set up to manage the incoming National Pensions Savings Scheme.
Launching the document, Purnell said it was critical that the DWP simplified the second pension, which acts as a means-tested top-up to the basic state pension. He proposed replacing the complex calculations linked to annual earnings with a fixed sum paid to everybody, based on the time they have spent working or caring.
Purnell suggested that the figure could be £1.40 per week for every qualifying year, but it is not clear whether that qualifying period would be capped.
If this is adopted in the government's final proposals next year, it could be introduced in 2012, when ministers also plan to restore the costly link between the basic state pension and earnings.
Purnell said: 'Under our proposals, every year spent working or caring would count. Someone who worked for 43 years, for example, would get around £135 a week from the state on retirement, whereas a person working or caring for 30 years would get around £115.'
Critics have long called for reform of the second pension, claiming that its complexity and means-tested nature discourage those entitled to claim it.
The Liberal Democrats, for example, have called for it to be merged with the basic pension to form a single, universal payment.
However, Purnell this week dismissed such 'citizens' pensions' as 'unaffordable'. He cited research indicating that a basic rate of £114 (the current minimum income guarantee), uprated by earnings and linked to additional accrued rights, would cost £30bn more by 2015 – a rise of 2% on UK GDP.
Purnell said his proposed reforms would cost just £10bn and would retain the ability to target second pension payments at lower earners.
'These costs fall within the range outlined as affordable by the Pensions Commission,' he said.
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