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£144pw state pension much less generous than original White Paper proposals
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But workers who contracted-out being treated much better
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Improvements for those in contracted out schemes being funded by lower flat-rate pension for others
Aims of the reform are right: The aim of these state pension reforms is absolutely right. It is vital to ensure the state provides a firm foundation of retirement income on which people can build their private savings. As auto-enrolment proceeds, private pension provision is supposed to increase sharply in future, but this cannot happen safely unless the current state pension system is radically reformed. That is why these proposals are broadly welcome, however there are some areas of concern which do not seem to have received much attention.
White Paper proposals are far worse than original Green Paper: Unfortunately, the new system proposed in the White Paper is substantially less generous than the proposals in the original Green Paper. Indeed, the proposed flat-rate state pension is 11.8% less than was suggested in 2010. The £144 a week after 35 years contributions (instead of £140 a week in 2010 terms after 30 years contributions) is worth £4.11 a year for each full contribution year, as opposed to the £4.66 a year which the Green Paper put forward. In addition, the new scheme will not start before April 2017, which is a year later than originally intended and this means many people will be left out who would have hoped to be included.
Making the pension less generous leads to more people losing out: Overall, the reforms will be a big improvement for many women, lower earners and the self-employed. However, the reduced generosity and delay in the new pension proposals means that many people will be worse off in future than originally expected.
Particularly unfair for women who are hit by second pension age rise at short notice: This delay in starting the new state scheme is particularly unfair on the group of women now aged around 60 who had a second rise in their state pension age imposed on them at very short notice by the Coalition. The original plan was that they would at least receive a better state pension to compensate for this delayed state pension receipt, but that is now no longer the case and they are being left out.
But terms for those in contracted out schemes are much improved: The White Paper is now proposing that people who contracted out of the state pension system will receive special treatment. This applies, of course, to public sector workers and any private sector employees in a defined benefit pension scheme. Those who contracted out in the past, or who are still in contracted out schemes are going to be allowed to accrue extra years of state pension relative to private sector workers who were not in a contracted out scheme. In other words, those who trusted the state to provide their pension are losing out significantly relative to people who paid lower national insurance in the past and opted out of some state provision.
Contracted out pension deductions can be made back up again by accruing more in the new scheme: Workers who do not qualify for the full £144 a week state pension, due to the fact that they have some of the entitlement reduced to account for years when they left the state earnings related pension system in exchange for paying reduced National Insurance, are now going to be allowed to keep on accruing more state pension by effectively contributing for more than the maximum 35 years. This is a new benefit for contracted out workers, that did not appear in the Green Paper. Other workers will not be allowed to accrue more state pension after they reach the £144 a week in future, but anyone who contracted out will be able to receive the contracted out amount from their private scheme and also continue to get more state pension too. This seems to penalise people who were not fortunate enough to have a workplace pension scheme, or private sector workers who relied on the state for their pension.
Increased differential between public and private sector schemes: Public sector workers will particularly benefit from the changes introduce in the White Paper, relative to the original Green Paper. As their recent pension agreements with the Government were a 25 year deal, the White Paper says the schemes will not adjust their benefit structure to strip out any of the replacement for the earnings related state pension that is included in their current arrangements. Therefore, for the foreseeable future, public sector workers will see a significant increase in their overall pension entitlements each year. Not only will they be accruing a higher state pension (for which they will, of course, be paying the the extra 1.4% rate of National Insurance that all other workers pay) but they can also continue to accrue an employer taxpayer-guaranteed pension that still gives them the replacement for the earnings-related state pension that used to exist. By contrast, private sector employers will be given an over-ride to allow them to adjust the benefit structure of their defined benefit schemes, to take account of the fact that they will be able to strip out the replacement for state benefits that future workers will receive in the new flat rate state pension. Of course, this is very complex, but it does seem as if public sector workers are doing particularly well out of the changes made to the state pension reform proposals, while the generosity of the new state pension has been cut by 11.8% for everyone. I have always said that public sector workers deserve good pensions and I do hope they will recognise that the White Paper seems to have improved their relative position quite significantly.
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