Select Committee on Work and Pensions Fourth Report


455. The central package of reforms outlined in the White Paper is to:

  • Reform the state pension system to increase coverage for those with caring responsibilities and to provide a better platform for saving;
  • Introduce a new system of personal accounts;
  • Introduce limited reforms to the regulatory environment for existing occupational pension provision.
  • Increase the State Pension Age to 68 by 2044.

456. Evidence to the inquiry suggested that there is a broad degree of consensus in support of this overall package. A key question for the Committee was whether this consensus was likely to be enduring. In Sweden, the Committee identified two factors as being particularly important to lasting consensus around pension reform - affordability and sufficiency of benefits. We conclude this report by attempting to identify some strains that might emerge in future and threaten to destabilise consensus.

Personal accounts

457. As part of the package of reforms in the White Paper, the success of the personal accounts scheme will be critical. In evidence to the Committee on 7 June, the Secretary of State said:

    "The question for us is how much more and how many more people we can get to save. This is going to be the acid test for these reforms, and I accept that. The whole balance between what we were doing on personal accounts and then the complementary reforms for the State Pension are designed fundamentally to generate more savings, to provide people with the peace of mind to know that it is worth their while to save. That is what we have to do."

458. The Committee identified a number of possible risks to the success of the scheme and recommends that the Department prioritise:

  • Maximising participation of the target groups, in particular the self-employed and employees in small businesses. This will be a challenge given that there is to be no automatic enrolment process for the self-employed and concerns expressed by small business representatives about the new obligations the scheme will impose on them.
  • Ensuring that the delivery model is universal and that the process for auto-enrolment is as simple as possible for both employers and individuals.
  • Taking steps to ensuring people have the information and advice to make the right decisions as to their participation in the scheme.
  • Developing independent, arms-length governance arrangements.

Existing occupational provision

459. The Committee heard conflicting views on whether there was likely to be a 'levelling down of existing provision in response to the introduction of personal accounts. This will need careful monitoring. The Committee welcomed the deregulatory review and the inclusion of representatives from Which? and the TUC on the group established to make recommendations to Government.

State Pension Reform

460. The Secretary of State explained that the state pension reforms "are fundamentally designed to support the introduction of the low cost personal accounts."[553] In particular, therefore, it is vital that the scope of means-testing is reduced so that people can safely be auto-enrolled with confidence that they will not end up on Guarantee Credit in the future. To encourage this confidence we recommend that the Government:

  • make a firm commitment to re-link the Basic State Pension to earnings no later than 2012 in primary legislation; and
  • publish details of what groups are likely to find themselves entitled to Guarantee Credit in future and what it estimates to be the range of possible outcomes for future entitlement.
  • Other key parameters of state pension reform - such as the indexation arrangements for Pension Credit - should also be placed in primary legislation to give confidence that they will be carried through.

462. The Committee notes that there is an element of complexity in the state pension reforms, particularly as regards future entitlement to the State Second Pension. Alternative proposals for state pension reform have included the suggestion that the Government should move more quickly to a single-tier flat rate state pension. We recommend that further down the line - probably as part of the independent review that we recommend - the case for merging the Basic State Pension and the State Second Pension should be reviewed. In addition, we strongly recommend that the Government look again at the case for reviewing tax relief on pension saving, recognised by the Pensions Commission as "costly, poorly focused, and not well understood."

State pension Age

463. A further source of difficulty might be around raising the State Pension Age. The Committee registered strong concerns around the potential impact of this on lower socio- economic groups. We recommend that this should be looked at by an advisory commission, tasked with one of the periodic reviews of the pensions landscape. We also recommend that future rises are subject to achievement of the health inequalities target.

Locking in consensus?

464. The reforms will inevitably come under strain over coming years. As we have suggested, some key parameters need to be in primary legislation to give confidence that the reforms will be carried through. At the same time periodic reviews will be needed to provide independent advice as to whether changes are needed in response to changing circumstances.

553   Q 248-9 Back

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Prepared 22 July 2006