Women and the state pension system
178. The Secretary of State for Work and Pensions
told the Committee that 'women's pensions are, in a sense, a national
scandal in the sense that only 50% of women get the full basic
state pension. In their own right I believe only 17% of women
get a full basic pension, i.e. from their own work, and yet we
have a situation where we expect women to be carers so often and
we have an employment market that has changed to an enormous degree
since Beveridge.'[392]
The Pensions Commission estimates that 69% of women aged 65-69
who receive the Basic State Pension (BSP) receive less than the
full amount (compared with 15% of men). 40% of women who receive
BSP based on their own contributions are entitled to less than
75%.[393]
179. The problem is that entitlement to full BSP
depends on having paid, or been credited with, contributions in
the requisite number of years, usually 39 for a woman. While the
system contains mechanisms to compensate those who have taken
time out of the labour market, for example, due to caring responsibilities,
these are only partially successful. As the Pensions Commission
points out, there are several 'cliff-edge' features which 'mean
that women who fall below particular earnings levels or who have
a small number of years in employment not only accrue less pension
benefits, but disproportionately less.'[394]
The 'cliff-edges' identified by witnesses to the inquiry included
the following:
- In order to receive any BSP,
a person must have paid or been credited with contributions in
at least 25% of the requisite number of years.[395]
For a woman, this usually means at least 10 years of their working
life.
- The way in which Home Responsibilities Protection
(HRP)[396] operates
means it only partially compensates for time out of the labour
market. For example, it does not, in itself, help to accrue contributions,
rather, it reduces the number of years for which a person would
otherwise have to satisfy contribution conditions.[397]
Furthermore, it works on whole years and therefore does not cover
partial years of caring. Someone caring for a disabled person
is only covered if they provide care for 35 hours a week or more.[398]
- The mechanisms to compensate for caring in the
State Second Pension (S2P) scheme are more limited than those
for BSP (for example, a person taking time out of the labour market
to care for a child is only covered if the child is under 6, rather
than 16 as is the case for HRP).[399]
- A person earning below the Lower Earnings Limit
(£82 pounds a week in 2005/06)[400]
in any one job does not accrue state pension rights even if they
earn more than the Lower Earnings Limit overall. (However, those
on Working Tax Credit are credited with contributions).[401]
180. We took no evidence on the thorny issue of the
'Married Women's Stamp'.
181. Women's increased participation in the labour
market, together with policy measures (such as HRP) which were
introduced to help better compensate women for caring means the
situation is changing for women who will be pensioners in the
future. [402] The Pensions
Commission found that 'women below the age of 40 are now as likely
to be accruing BSP rights as men, and more likely to be accruing
S2P rights'.[403] However,
it will be at least 25 years before these women are pensioners.
Moreover, the system as it is does not provide full compensation
for caring. The Pensions Commission considered that addressing
the 'cliff-edges' in the state system 'would have an impact on
the adequacy of pensions for lower paid women that could not be
achieved by any change in policy towards private pensions which
the Commission might recommend.'[404]
182. Two different approaches are taken as to how
these issues should be addressed. The first is to argue that the
'contributory' principle should be retained, but needs to be made
more inclusive by recognising a broad base of contributions including
paid work and unpaid care work.[405]
The other is to argue that the current system should be replaced
by a universal or 'citizens' pension, with entitlement based on
residence. Key questions to consider in weighing up the options
include whether the principle of contributing to a pension is
an important one to retain because it relates back, as the Minister
put it, 'to citizenship and rights and duties';[406]
and whether replacing this with a new test, such as 'residency'
would create new difficulties; and whether adjustments to the
current system to make it more inclusive are practicable and would
feed through in a reasonable timescale.
183. Both the Fawcett Society and Age Concern argue
that there are high levels of attachment to the contributory system.[407]
The Fawcett Society argues that some changes to make the current
system more inclusive could be made retrospectively, such as removing
the '10-year rule'[408]
and using child benefit records (and some form of self-declaration
for periods prior to 1978) to backdate home responsibilities protection.
DWP has said that it is 'looking at a number of options which
could help those with incomplete NI records'. In examining options,
it is taking account of 'affordability and complexity' and impacts
on other aspects of social security benefits and the wider economy.
[409]
184. Those supporting the introduction of a universal
or citizen's pension - such as the Pensions Policy Institute and
the Equal Opportunities Commission[410]
- do so on the basis that adjustments to the current system would
be overly complex and in any case result in a less inclusive system.
Alison O'Connell of the Pensions Policy Institute (PPI) said the
result would be that the 'complexity increases, the amount of
record keeping increases, and inevitably it would only reduce
the potential for women to be disadvantaged, not eradicate it.'[411]
She also thought it was difficult to see how it could be retrospective
and considered a citizen's pension, based on residency, to be
a more pragmatic way to create an inclusive system.[412]
She argued that a citizen's pension of £105 a week[413]
would 'almost eradicate' the 'guarantee credit means-test', although
there would still be a residual 2-3% and the need for means-tested
benefits such as Council Tax and Housing Benefit.[414]
The National Association of Pension Funds estimates that a citizen's
pension of £105 a week 'could be afforded today and through
transition within current net expenditure on state pensions.'[415]
To afford the increasing long-term cost, 'change to one or more
of the following is likely: the current level of state spend on
pensions; tax or National Insurance contribution rates; state
pension age; or amount spent on tax relief.' The Secretary of
State has said he has 'an absolutely open mind, veering towards
being very positive' about a universal or citizen's pension.[416]
185. Age Concern pointed out that different approaches
to pension reform help women in different situations.[417]
For example, older widows (often considered the poorest pensioners)
frequently get a full Basic State Pension based on their former
husband's contributions, and so would benefit from an increase
in the level of Basic State Pension. Women in couples often have
the lowest individual incomes and would be more likely to benefit
from a Citizen's Pension.
186. The Committee recommends that the Government
by April 2006 provides detailed analysis of the advantages and
disadvantages for women in different situations (for example,
by age, marital status and ethnic group) of the two key proposed
ways forward - creating a more inclusive system of credits within
the current contributory system versus introducing a universal
or citizen's pension.
Savings Credit
187. Entitlement to Savings Credit is calculated
as 60% of any 'qualifying income' (such as a private or occupational
pension, although this can include earnings) above the Savings
Credit threshold[418]
(set at £82.05 pw, 2005/06 rates). Savings Credit rewards
'qualifying income' above this threshold level, up to a maximum
of £16.44 a week. Once income goes above Guarantee Credit
level (£109.45 pw), Saving Credit entitlement starts to be
reduced.
188. As the Committee pointed out in its previous
report on Pension Credit, those without a full Basic State Pension
(BSP) are not rewarded to the same extent.[419]
For this group, any extra is used to take their income up to BSP
level and only the excess is rewarded. The Committee said that
it believed 'the operation and effectiveness of the Pension Credit
would be significantly improved if it 'always paid to save', i.e.
if all second pension and savings income was rewarded by the savings
credit, not only that above the level of the basic state pension.'
The Committee therefore recommended that the Government 'should
inquire into the immediate and long-term costs, benefits and affordability
of extending the Pension Credit in this way and make public the
results.'[420] In its
response, the Government said that a key objective of Pension
Credit was to 'reward those who have worked hard and saved'.[421]
For this reason, it follows that a 'full state pension, based
on contributions (and credits for those with broken work records
and for those who had caring responsibilities) should be the foundation
of state provision'. It also argued that: 'To do otherwise would
increase the cost of Pension Credit significantly. For example,
rewarding all income for those aged 65 and over by removing the
savings credit threshold entirely would cost around £8 billion
on top of the existing Pension Credit package. It would also extend
support much higher up the income distribution, contrary to our
declared aim of focusing support on those pensioners who need
it most.' [422]
189. Since that time, however, we have had more explicit
recognition from the Government that the current contributory
benefit does not adequately cover those with caring responsibilities.
The Minister for Pensions told us that:
"I do not think that any of us would say that
the National Insurance scheme we have now, with all these different
nuances to it, often adversely affecting women and, in the past,
carers, is the kind of modernised social insurance system you
would want." [423]
190. In the light of this, the Committee considers
there is a case for reviewing the way in which Pension Credit
rewards savings. The estimated costs of rewarding saving above
the level of the BSP actually in payment is as follows.Table
4 : Option 1. Reward all savings in excess of the Basic State
Pension in payment (excluding any increments for deferment)
