Select Committee on Social Security Seventh Report


64. Most contributors to this inquiry have understandably concentrated on the problems of today's pensioners. But in considering the issue, we judged that it was impossible to examine possible solutions to poverty among today's pensioners without considering the wider framework of the Government's strategy for pension reform. Policy decisions aimed at alleviating the plight of present pensioners must be made in the context of Government policies for the longer term if the latter are not to be undermined.

65. The Minister of State confirmed to us that by 2050 the value of the basic state pension will be worth in today's terms £31 a week.[102] That is less than half its current value, and less than half the value of the MIG for a single person aged 60-74.

66. The extent to which people succeed in retiring above this level will depend increasingly on how much they have managed to save through SERPS and the state second pension and through private forms of pension provision. We received evidence arguing that private forms of pension, including stakeholder pensions, are unlikely to be suitable for those on low and fluctuating earnings.[103] The Minister agreed that funded pensions are not suitable for people earning less than £9,000 a year.[104] Mr Emmerson of the Institute for Fiscal Studies told us that of those in the Government's target earnings group who do not already have a private pension, many have periods of unemployment and/or fluctuating earnings "which mean they should not lock up their savings. They should think carefully about whether they want to do that or not".[105]

67. We therefore conclude that those on the lowest incomes throughout their working lives or with intermittent and fluctuating earnings will be largely dependent on SERPS and the state second pension, to lift themselves above the MIG. While we have not found agreement on a single definition of poverty, we doubt that anyone would draw the poverty line below the MIG, and note again that this is a level which the Minister has said he could not live on.[106]

The state second pension

68. The question we have asked ourselves during our inquiry is whether the Government's pension reforms, and the state second pension in particular, will prevent pensioner poverty in the future. We have also been concerned to establish whether the Government's strategy to improve the situation of today's pensioners is consistent with its long-term goals. In looking ahead we are not concerned only with the situation when those reforms are fully mature. This will not be until 2050. Judging by the history of pensions in the last fifty years, the system may well have been changed several more times by then. In his evidence, Mr Ross drew attention to the difficulties of sustaining a political consensus on pensions and argued that the long-term nature of pensions calls for a degree of flexibility in the system.[107] So we have been concerned with the prospects for all those reaching pension age between now and 2050, and for the system as a whole to sustain achievement of its aims on a long-term basis. In this context we note the Government's aspirations in the pensions Green Paper that "People who work all their lives should not have to rely on means-tested benefits when they retire"[108] and that the MIG should rise with earnings "so that all pensioners can share in the rising prosperity of the nation".[109]

69. People who are currently approaching retirement will gain little from the introduction of the state second pension and stakeholder pensions. Those who have contributed to SERPS will be receiving SERPS payments which will diminish in value for future SERPS pensioner generations. But because SERPS is earnings related, the highest SERPS payments will be received by those who have had relatively high earnings. At the same time, many women will still be retiring without entitlement to a full rate basic state pension, and on the Government Actuary's estimates there will be a slight increase in the proportion of men retiring in this situation.[110] As for those already retired, those approaching retirement will be largely dependent on what the state does for them in setting the levels of the components of the state pension and the MIG.

70. In the longer-term, the state second pension will increase the state pension rights of the low paid, compared to the rights they would have received under a declining SERPS. The Department of Social Security has told us that "This will at least double the additional pensions of low earners".[111] But during the next 25 years, figures from the Government Actuary suggest that the MIG will remain the main weapon against pensioner poverty. He has calculated the total state pension rights of low paid people retiring in the future,[112] taking into account the state second pension. This shows that for people retiring in the next 25 years, the second state pension will reduce the fall in total state pension rights in relation to average earnings compared with the situation had SERPS continued. But it will not be until about 2025 that the decline is halted. As the National Pensioners Convention put it "There is a danger that, in concentrating on the present situation and the long-term outlook, we may lose sight of the problems that can be expected to emerge in the next 10-20 years".[113] In that period, a growing number of pensioners will find their state pension falling below the level of the MIG and will be entitled to means-tested help.

71. After about 2025, the total state pension rights of people who have contributed to SERPS and then the state second pension for a full working life will rise gradually. By 2050, someone retiring in that year would have a combined basic and state second pension at the level which the MIG will be for a single person aged 60-74,[114] assuming the MIG rises with earnings. However, it will require a 49 year contribution record to achieve a full state second pension and although there is provision for credits, these are not as comprehensive as for the basic state pension. Mr Ross explained that "The Pension Provision Group's view is that even by 2050 there will still be the prospect of people with basic pension rights, basic pension and state second pension, who will be looking to rely on a Minimum Income Guarantee, particularly when they are older¼.. but possibly for some at the outset because there are going to be many people of modest means who will not qualify for the full state second pension because it does not have the same level of credits. It is much more work-based than the basic pension is and the ¼. people we are talking about will have breaks in employment and they will not have 49 years of employment."[115]

72. The Fawcett Society pointed out to us that parents are only credited into the state second pension whilst their children are under 5 and argued that "this cut off point is unacceptably low as many women with children over that age will still be working part-time and earning under the lower earnings limit and therefore ineligible for the state second pension".[116] The Fawcett Society also brought to our attention the requirement that carers of adults have to be spending at least 35 hours caring before they can qualify for credits for the state second pension whereas someone on the minimum wage has to work for only 18 hours a week to reach the lower earnings limit and hence qualify for state second pension credits. This, they say, values caring at roughly half the minimum wage.[117] Whereas periods of unemployment count for credits for the basic state pension, they will not for the state second pension.[118]

73. We are concerned that it is by no means guaranteed that a single person reaching retirement age in 2050 will have state pensions which take him or her above the level of the MIG. Moreover we note that on reaching 75 and 80, the gap between his or her state pension and the MIG will be increased because of the higher MIG levels at these ages, thus increasing the likelihood of reliance on means-tested benefits. The National Pensioners Convention pointed out that Ministers have admitted that by 2050, the proportion of pensioners dependent on Income Support is likely to have risen to 1 in 4 (from 1 in 5).[119]

74. Many pensioners will be part of a couple during the early years of retirement. If both partners have near full basic and state second pension that would mean they start retirement clear of the MIG. But over time, one partner will be widowed and they will reach the ages of 75 and 80 where the MIG level rises. Furthermore, contributors, including Help the Aged and Mr Ross, have drawn our attention to the growing incidence of divorce[120] which may mean that more people will be without a partner at the point of retirement.

75. A further consideration is the fact that the basic and state second pension are increased only by prices but the MIG is uprated with earnings. This means that even if people start retirement with state pension rights above the MIG level, any differential will gradually be eroded. The effect of this difference in uprating is compounded by the fact that private pensions are usually increased each year by no more than prices. Also, people whose incomes are only just above the MIG are likely to find themselves having to draw on their savings, so reducing any income from that source.

76. Our present inquiry has confirmed the concern we expressed in our inquiry into the Contributory Principle[121] that pensioners who have paid NI contributions all their lives will find themselves with state pension rights which do not keep them above the MIG level for more than a few years of their retirement. This will remain the case for as long as pensioners receive basic and state second pension upratings on the basis of price increases and the MIG is linked to earnings.

77. We conclude that the present policy of uprating the basic state pension, and the second state pension during retirement, in line with prices, while the MIG is linked to earnings, as is the state second pension at the point of retirement, is unlikely to be sustainable in the long run. Moreover, if it is right for the MIG to be linked to earnings, so too must both components of the state pension if we wish pensioners to share equally in the rising prosperity of the nation.

102   Q 269. Back

103   Appendix 17. Back

104   Q 290. Back

105   Q 198. Back

106   Q 251. Back

107   QQ 121-122. Back

108   A new contract for welfare: Partnership in Pensions, DSS, Cm 4179, 1998. Back

109   Ibid., p 34. Back

110   Q 142. Back

111   Ev., p. 77, para 4. Back

112   Response to the Pensions Green Paper, Chart Two, Pension Provision Group, 1999. Back

113   Ev., p. 38, para 7.5. Back

114   A new contract for welfare: Partnership in Pensions, DSS, Cm 4179, 1998. Back

115   Q 125. Back

116   Ev., p. 163, para 10. Back

117   Ibid., para 11. Back

118   A new contract for welfare: Partnership in Pensions, DSS, Cm 4179, 1998. Back

119   Ev., p. 34, para 3.8. Back

120   Q 115. Back

121   Social Security Committee Fifth Report, Session 1999-2000, The Contributory Principle, HC 56-1, para 118. Back

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