Commenting on the Government’s proposed £140 per week pension as outlined in the latest Pensions Bill, Fraser Smart, Managing Director of Buck Consultants Ltd (Buck), says:
“For the £140 a week flat rate pension to work the Government needs to tackle contracting-out. There are a number of ways of doing this but taking contracted out benefits back into the state system has a great number of advantages and very few disadvantages.
“In my opinion, this is the big issue coming out of the Queen’s Speech. We commend the Government for pushing ahead with the £140 per week pension and believe it has the potential to make pensions simpler, solve GMP equalisation, reduce Government borrowing in the short term, and save money on civil servants.”
Advantages:
- By making schemes buy back contracted out benefits into the state system, the Government would have the advantage of a large influx of money into its coffers; in exchange for liabilities stretching over the next 50 years or more.
- The Government can then give the £140 a week pension to all, without either those who have contracted out benefits having to have them taken off the £140, or those contracting out getting more than those who were contracted in. Paying the £140 per week pension is automatically simpler and fairer. Not doing this will lead to complaints over the years.
- Once the benefits have been bought back into the state system and members benefits reduced, pension scheme administration is simpler.
- Pension schemes are easier, quicker and cheaper to wind up.
- You reduce the number of Civil Servants at Longbenton.
- GMP equalisation issues disappear, a Government created problem solved by a Government created solution.
- The issue of Anti-Franking disappears.
Disadvantages:
- Underfunding in schemes could get worse as contracted out benefits are bought out in full. As people will get £140 a week state pension, however, people shouldn’t generally lose out.
- Schemes with a Reference Scheme Test underpin might have to have a notional underpin set up.
- Schemes would have to reduce benefits of members when contracted out benefits ceased to be held in schemes, involving short term actuarial work for long term gain.
To read Fraser Smart’s full blog on the Queen’s Speech, go to: http://blog.buckconsultants.com/the-pensions-bill-and-the-queens-speech-9-may-2012/
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