Press release

State Pension Reform – it has to be Option 2!!

Monday 27 June 2011

Flat rate, simple £140 state pension for all, making it safer to save

Can't proceed with auto-enrolment without this radical reform

Consultation on the Government’s proposed reforms of the State Pension (‘A State Pension for the 21st Century’) has just closed. All the evidence suggests that the radical reform of Option 2 – which would create a flat rate, single –tier state pension – above the Pension Credit level – is the only realistic choice.

Option 2 will mean that our state pension system in future would finally be understandable and ensure that for younger generations, the threat of means-testing penalties to their private pensions on retirement will be almost completely lifted.

Latest research from the National Association of Pension Funds once again highlights that paying a flat-rate state pension would encourage more pension saving, especially among the young. Nearly half of all 18-34 year olds say they would save more and we all know this is important if we are to help future retirees enjoy a better lifestyle.

Option 2 is the one that will give us a better and more sustainable pension system for the future, but of course it does not deal with current pensioners – only those retiring in future. Is that a political error of judgment? Or will today’s pensioners accept that the system they are stuck with was not designed by this Government, that it is too expensive to reform the state pension for everyone and that at least those people who can save in future will not be penalised for doing so? That’s a tough call and I fear that many older people will, understandably, be angry but Government must get its messages through loud and clear.

We cannot carry on as we are.

We cannot safely auto-enrol all workers into a pension scheme next year, nor spend money on NEST, if 1 in every 20 of them could end up not even getting the value of their contributions back in retirement, due to the risk of losing the money in the means-test.

If we do not remove this already known risk to the pensions of the very low and moderate earners at whom auto-enrolment is aimed, we will not have a system fit for the 21st Century.

I would like to see the Government extend this new system in some way to existing pensioners as well, even if from a later age, so that the political pain of pension reform can be minimised. There are no easy answers, but maintaining the status quo would be a disaster.

So, yes we need a simple state pension. Yes, we need to ensure that it pays to save. And yes, the status quo is not fit for purpose. In other words, Yes to Option 2.

-ENDS- 

NOTES FOR EDITORS:

1. Consultation closed on Friday and Saga has supported Option 2, which entails simplifying the state pension to pay a flat-rate state pension above the Pension Credit level (with transitional protections for those already entitled to more than the new state minimum pension payment). Option 2 would be much fairer to women in particular, as well as other disadvantaged groups such as the disabled who tend to have interrupted, low-paid or part-time working careers.

2. Currently the state pension comes in several different parts, each with its own qualification criteria and rules, referring to different contribution periods and uprated by differing amounts each year. There is (1) the Basic State Pension, (2) Second State Pension (3) State Earnings Related Pension, (4) Graduated Pension and then if those are not sufficient there is also (5) the Pension Credit – which consists of 2 parts – a Guarantee Credit and a Savings Credit. This last part is means-tested, with many women or lower earners finding that they lose all their private pension income in the means test.

3. Option 2 would ensure that the mass means-testing of pensioners entailed in the current state pension system (nearly half of pensioners are entitled to means-tested benefits) would end. That would mean it becoming safer to save, without fear of losing much or all the private savings in a means-test on retirement.

4. Option 2 would also mean an end to contracting out – the most complex part of our current state pension system which involves employers and workers being allowed to pay lower National Insurance (receiving a rebate on their NI payments) in exchange for pension rights in a private pension scheme that will replace some of their state pension.

5. Even the NAPF has admitted that ending contracting out (which will have to happen under Option 2 and will hugely simplify our pension system) will ultimately be beneficial for defined benefit pension schemes, because the rebates offered are not enough to compensate for the additional benefits schemes have to offer.

6. Option 1 would not achieve the aims of a fair and simple pension system and merely tinkers with the current complex arrangements, rather than offering the radical reform that we have needed for so long.

For more information please contact the Saga Press Office on 01303 771529