APPENDIX 20
Memorandum submitted by Peter R Ward (CP
18)
1. The contributory principle, in its broadest
sense, means individuals paying on a regular basis, in the expectation
that this will lead to the provision of a benefit at a promised
date in the future or when defined circumstances arises. Employers
are also involved in making related contributions on behalf of
their employees for the provision of the above benefits. Usually
the contributions are earnings related. The benefits received
can be flat rate benefits, earnings related benefits, or a combination
of both.
2. Since Beverage, and particularily since
the 1940s, the general trend has been the gradual improvement
in State pension provision, except for short periods usually during
times of austerity. The main period of sustained progress came
in the 1970s. In the late 1970s significant improvements were
made to State and Occupational Pensions. Also introduced during
this period were earnings related sick pay and unemployment benefits.
The membership of Occupational Pensions and related benefits increased
significantly during the 1970s particularly for lower paid staff
and manual employees.
2.1 Virtually all contributing employees
experienced significant benefit improvements, especially women
and low paid workers with earning above lower earnings level (LEL)
which reflected the value of the single OAP for each year.
2.2 Most of the cost of these improvements
to State benefits was sustained by modest increases in National
Insurance contributions plus additional support from general taxation.
2.3 The improvements in both the State and
Occupational pensions, in the 1970s, was undermined by legislation
during the 1980s. The detrimental effects will continue unless
improvements are introduced. The most significant reductions
have been suffered by the low paid. Women are to carry the full
burden of pensions equality. They will pay more for longer for
significantly less State pension benefits.
2.4 Some have benefitted from Personal Pensions
but millions of others, including those persuaded to opt out of
Occupational pensions and Serps, have suffered substantial benefit
losses. Final salary Occupational Schemes are experiencing reductions
in the important Serps guarantees. They are being overburdened
by legislation biased against Occupational Pensions and contributing
to their decline.
2.5 These detrimental changes, to UK pension
provision, have been accompanied by substantial increases in National
Insurance contributions (see graph and tables) and especially
so for women. Employees and Companies are paying twice to fund
the transfer from State to private pension provision and trying
to compensate for the reductions in State Pensions—costing
about 9 per cent extra for the lower paid. State and insurance
Companies have lost billions of pounds during the Personal Pensions
fiasco, causing higher charges.
3. Current developments outlined in the
recent Green Paper offer some improvements but will not halt the
general decline in State Pension provision, except for the increasing
number of poor pensioners who will need, and be eligible for,
means tested benefits. The SSP proposals are inadequate and costly.
The financial burden of paying twice to compensate for declining
State Pensions illustrated by the proposed shift from 60 per cent
and 40 per cent private to 40 per cent and 60 per cent respectively,
will adversly affect most workers pensions. After another 30
years, with employees and businesses paying further increases
in NI contributions, most employees will obtain State Pensions
worth even less than today, nearly 10 per cent less than their
peak value and over 25 per cent below their 1978 projected value.
4. Paying National Insurance was welcomed
by virtually all employees when it was first introduced because
of the valuable security it promised to most workers. Surveys
and personal experience show it was far better accepted than most
other taxes, up to the beginning of the 1980s when NI payments
did offer good benefits for most workers, pensioners and the lower
paid. The series of cuts and detrimental changes to pension provision
in the last 20 years has undermined, but not ended, its general
public support.
5. The advantages of National Insurance
contributions are: Its universal benefits for virtually all employees.
The re-distribution effects in regard to benefits towards the
lower paid and carers. The safety net it provides for virtually
all employees who face redundancy or low earnings for significant
parts of their working lives. The very low administrative costs.
Security from fraud, high charges and falls in the Stock Market.
Its deduction from wages which stops the money being spent on
non essentials especially by thoughtless, irresponsible, or uneducated
workers. Its immediate deduction from those earning above LEL
which maximizes its income. The important way it spreads pension
risk from total dependence on the private sector, and also, causing
further UK finance inflation.
5.1 The weaknesses of NI contributions are:
The vulnerability to political changes in benefits. A lack of
frequent, understandable, and individual State Pension benefit
statements. Changes which segregate pensions from the National
increase in prosperity. The moves to mostly flat rate benefits
will alienate most who are not low paid. Not catering for self
employed who are not on high earnings.
6. The State contributory system must have
a future if the vast majority of people are to have decent low
cost benefits with the many advantages described in para five
above. The drawbacks could be overcome by reaching binding all
Party consensus on this subject. Also assisting a better understanding
and support for State Benefits by giving contributors better information
and perhaps to buy units of benefits, each year, so that any changes
would be much more obvious. Demographic and cost implications
must be more fairly assessed.
7. Tax and benefit reforms are overdue especially
for the lower paid and to spread the burden of redistribution
by lifting the Upper earning level. National Insurance rebates
should be without cost to State finances. The planned Second State
Pension must be changed.
8. The contributory system of State Pension
benefits, after the second world war. State Pension benefits were
worth about 18 per cent of average earnings. Its lowest level
was in the late 1960s when it fell to 16 per cent. During
this period new Governments brought in different unco-ordinated
versions of supplementary small State pension schemes.
9. In the 1970s a major expansion of contributory
Occupational Pension schemes took place, in virtually all but
many of the smaller Companies. This extended membership to lower
paid staff and to manual workers. These schemes gave a significant
improvement in pensions, usually based on 1/80s of final pensionable
earnings, and other benefits such as chronic sickness pensions.
The contribution rate was usually 5 per cent of employees salary
and 10 per cent, on a similar basis paid by the Company.
10. In 1978 Barbara Castle reached an agreement
with Ted Heath—for an all Party consensus—for two
new major policy initiatives to end the stop-start short term
State additional pension policy initiatives of the 1950s and 60s.
These policies struck a new balance in pension provision between
State and privately funded Occupational Schemes. One decision
was to link the OAP to avarage wage increases so that pensioners
would share in the national prosperity. It was set at about
20 per cent of average earnings.
11. The other main decision was to introduce
the State Earnings Related Pension. Serps gave earning related
pensions to millions without a decent Occupational Pension based
on 1/80s of their 20 years best earnings, indexed to national
average wages. Serps also gave significant minimum pension guarantees
to Occupational Pensions. The two State Pensions would have
guaranteed nearly all workers who had paid full National Insurance
contributions, especially the lower paid. Over 40 per cent for
those retiring with National average earnings. Over 60 per cent
for those with half National average earnings as a pension from
the year 2000. Total State Pension benefits in 1979-80 were 23
per cent of National average earnings.
12. The new Government, elected in 1979,
scrapped the all Party consensus on Pensions. First the indexing
of the OAP, after retirement, to National average wage levels
was scrapped and its indexing to the retail price index established.
Then the retirement value of Serps was reduced first by changing
the pension fraction from 1/80s down to 1/100s, and second, by
changing the best 20 years earning to the individuals lifetime
earnings. These two changes would start in the year 2000 gradually
reduce the value of this pension by, on average, between 30 to
50 per cent, depending on earnings. The widows/widowers pension
is to be cut by 50 per cent from the year 2000. These changes
are damaging to most people, especially women, pensioners, those
not in an Occupational Pension and those on lower incomes. Later
in the 1980s the deduction of LEL details were changed, again
reducing the value of Serps by, on average, a further 2 per cent.
These cuts, in total NOW mean that the OAP is worth about 16 per
cent of National Average Earnings and Serps 17 per cent. Total
State Pension in 1998-99 are about 33 per cent of National average
earnings.
If this decline continues by the year 2025
the OAP would be worth about 11 per cent and Serps 12 per cent.
Total State Pension by 2025 of about 23 per cent of average
earnings. The cost for individuals compensate for these losses
is about 6 per cent extra for those on average earnings and 9
per cent for half average.
13. If the recent pensions green paper proposals
are implemented the steady decline of the real value of the OAP
and Serps will continue until it is worthless. The increase in
the means test level for pensioners is welcome but the vast majority
of pensioners feel very let down and by these proposals and trust
they will not be forgotten by the Government. The proposed Second
State Pension which will gradually replace Serps will not halt
the decline in pension provision for most people, but will slow
it down for those below half National average earnings. The Second
State Pension will be more costly, will not give the same value
for money as a wage indexed pension or as did Serps and it will
alienate those above half average earnings from contribution.
The cost to buy private to compensate for State cuts will still
be high. A modification to the indexing of the OAP and modest
Serps improvements could give more acceptable improvements and
be less costly. By the year 2025 the OAP will still be worth 11
per cent and SSP 13 per cent. Total State Pension by 2025 of
about 24 per cent of average earnings.
14. The Green Paper proposals to address
some of the legislative burdens placed on Occupational Pensions
are welcome. It must also ensure a level playing field with similar
concessions as those given to Personal or Stakeholder. Both could
stop the decline of these pensions. It could without increasing
cost give a fairer deal to early leavers who are still treated
poorly by most schemes. Also welcome are the plans to give better
value to contributors to Stakeholder pensions but these will need
further strengthening to adequately reduce further deceit and
mis-selling by the pensions industry. Some Personal Pension providers
offer very beneficial final salary schemes it would be a tragedy
if the Government did not give positive encouragement for these
to be provided, as well as the risky money purchase schemes.
15. National Insurance contribution rates
for average income employees (reference DSS Pensions Actuary).
Percentage
| Year | 1975-76
| 1985-86 | 1990-91
| 1998-99 | 2010
| 2020 | 2030
| 2040 | 2050
|
| Serps Employee | 5.1
| 8.0 | 7.95
| 8.95 | 8.5
| 8.1 | 8.3
| 7.7 | 6.8
|
| SSP Employee |
| |
| | 8.5
| 8.3 | 8.7
| 8.3 | 7.9
|
| Serps Employer | 7.7
| 9.65 | 9.55
| 9.1 | 10.6
| 10.2 | 10.4
| 9.5 | 8.4
|
| SSP Employer |
| |
| | 10.7
| 10.4 | 10.9
| 10.4 | 9.9
|
16. National Cost of Serps/State Second Pension (reference
DSS Pensions actuary).
£billion
| Year |
| 2010 | 2020
| 2030 | 2040
| 2050 |
| Serps |
| 9.4 | 12 |
14 | 14
| 14.6 |
| SSP |
| 9.0 | 11.9
| 15.6 | 18.8
| 25.1 |
11 May 1999
Figure 2
Figure 1
| 
