The Government’s Pensions White Paper hints at a slower increase in the State Pension Age than might have been expected, according to Towers Watson.
The consultancy also says that the proposals will present sponsors of defined benefit (DB) schemes with some difficult choices, and that the new single-tier pension will exceed the level of the means-tested Pension Credit by less than the Government has previously suggested.
Linking State Pension Age to longevity
The White Paper proposes that ‘future changes to the State Pension Age be made with reference to maintaining a proportion of adult life spent in receipt of State Pension.’
John Ball, head of UK pensions at Towers Watson, said: “When the State Pension Age reaches 67 in 2028, the ONS expects that this proportion will be 30.4 per cent for men and 32.8 per cent for women. If that is seen as the right starting point, the ONS’s population projections imply that the State Pension Age would need to reach 68 by 2041, 69 by 2053 and 70 by 2065.
“That’s not much faster than the increase to 68 by 2046 that is already on the statute books – though life expectancy forecasts could be revised many times by then.
“This looks like a plan for sharing extra years of life between work and retirement rather than spending them all in work. As such, it is a lot less aggressive than the Government could have been. However, the Government has not nailed down what the proportion to be ‘maintained’ should be. This leaves the door open to saying that the State Pension Age will need to go up faster to help mend the public finances.
“Giving people 10 years’ notice of their State Pension Age will make the assumptions about how quickly mortality rates improve in future more important. These are subject to a lot of debate.”
Loss of contracting out: A final straw for some DB schemes?
John Ball said: “Under the new system, DB pensions will only top up the State Pension and not replace part of it. As such, employers will lose the National Insurance rebates that can be worth up to £1,169 a year for some members.
“These rebates were scant compensation for the risks that employers were taking off taxpayers’ hands. Without them, however, employers will have to choose between paying more themselves, keeping the scheme open to existing members but reducing the benefits provided, or simply turning off the tap. Most employers have yet to decide what they will do but scheme closure could be a common response. It will be difficult to ask employees to pay more at the same time as their own National Insurance bills are going up.
“Ending contracting out brings the curtain down on an unusual feature of the UK’s pension system. Replacing part of the unfunded State Pension with funded workplace schemes has added complexity and increased the pension risk employers are exposed to, but has also eased the pressure that an ageing population will place on the taxpayer.”
£144 a week after 35 years
The single-tier State Pension was first sketched out in a Green Paper published in 2011. Differences between the final proposals and those the Government had pencilled in include:
• The gap between the full single-tier pension and the minimum pensioner income guaranteed by the means-tested pension credit will be just £1.30 a week in 2012/13 terms. The Green Paper had suggested a gap of £7.40 a week in 2010/11 terms.
• 35 years of National Insurance Contributions of Credits will be needed for a full single-tier pension and something between seven and ten years for any single tier pension. The Green Paper had suggested that these numbers would be 30 years and seven years.
John Ball said: “Currently, the longer that someone works or receives credits, the more State Second Pension they get. Under the new system, national insurance will become more like just another tax once people have earned the maximum amount. People will get £1.30 a week more with 35 years of contributions than if they relied on means-tested support and State Pensions could not then be increased further.”
A firm platform on which to save?
John Ball said: “Putting ‘£144 a week’ up in lights sends a clear message that the State will only provide the bare necessities. Most people will need to squirrel a lot of money away if they want to maintain anything like their previous standard of living in retirement.
“However, it’s going too far to say this gives people certainty about what the can expect from the State. A simpler system is harder to change stealthily but does anyone really expect future governments to leave the system alone? The cost of pensioner benefits and the power of the grey vote will pull politicians in different directions but further changes always look likely.
“Younger people with a full career ahead of them might have expected more under the old system. They may not be grateful to the Government for replacing a bigger pension with a simpler one.”
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