Memorandum submitted by Standard Life
Assurance Company (PC 03)
SUMMARY
— The current state pension settlement
is too complex for most people to understand.
— The Government should open consultation
on a simple single replacement for the current system.
1. The current state pension settlement
consists of a three-part structure. These layers become progressively
complex, culminating in the State Pension Credit, which is almost
impenetrable. With this level of complexity, there is little chance
of engaging people. This is demonstrable from the low take-up
rate of less than 70% for the State Pension Credit.
2. If the Government is to encourage people
to save for their retirement then the benefit of doing so must
be clear. People need to know what they will get from the state
at retirement, in today's money terms, in order to judge whether
it will be sufficient on its own or whether they should save privately.
3. As a country, we need to save more for
our future yet the current retirement benefits system has the
perverse effect of discouraging saving for many. Despite Government
insistence that the Pension Credit is a reward for saving, the
effective tax rate on savings is 100% on total income below the
maximum Basic State Pension and 40% above it. People understand
this and are choosing not to save. Advisers are advising people
not to save because it is not in their financial interests to
do so.
4. The Pension Credit has successfully lifted
large numbers of people out of poverty, which was one of its key
aims. But, it may create unnecessary poverty in the future, which
will increase future claims on means-tested benefits.
5. None of this should come as a surprise
to the Committee. There has been a constant stream of proposals
suggesting reform of state pensions over the last three years.
These come from a wide and diverse group of bodies: left-wing
think tanks, right-wing think tanks, independent think tanks,
employers groups, unions, politicians and representatives of private
pension providers.
6. All of these groups say similar things—that
we should have one simple state pension. There are subtle differences
between each of these proposals; for example, some are based on
qualifying contributions, others on citizenship. Regardless of
these minor disagreements, this level of consensus is unprecedented.
7. Consensus is necessary if state pensions
are to be reformed. That consensus is here now and the time is
right for Government to consult on reforming state pensions.
1 October 2004
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