The Single-tier State Pension: Part 1 of the draft Pensions Bill - Work and Pensions Committee Contents


1  Introduction

In the text of this report, our conclusions are set out in bold type and our recommendations, to which the Government is required to respond, are set out in bold italic type.

State Pension reform and the Draft Pensions Bill

1. The coalition Government has made clear its intention to reform the State Pension since 2010 when the Chancellor announced that the Treasury was working with the Department for Work and Pensions (DWP) on potential ways to simplify it "and provide a boost to pensioners for many years to come."[1] In the 2011 Budget the Government stated that State Pension would be reformed "so that it provides simple, contributory, flat-rate support above the level of the means-tested Guarantee Credit".[2]

2. DWP published a Green Paper in April 2011 entitled A state pension for the 21st century which set out two options for reform. The first would have accelerated the pace of existing reforms so that the State Second Pension would became flat rate by 2020 instead of the early 2030s. The second option was more radical and proposed the introduction of a single-tier State Pension, combining the Basic State Pension and the State Second Pension and set above the basic level of support provided by Pension Credit. The Government consulted on these options and published a Summary of Responses in July 2011. However, it did not indicate at that point which option for State Pension reform it intended to pursue, or what the timescale for reform was.[3]

3. The 2012 Budget announced that the State Pension would be reformed into "a single tier pension for future pensioners."[4] After a number of changes to the expected timetable for bringing forward the reform proposals, the Government published its White Paper, The single-tier pension: a simple foundation for saving, on 14 January 2013.[5] This was followed a few days later by the publication of a draft Pensions Bill; Part 1 of the draft Bill contains the legislative measures necessary to introduce the Single-tier State Pension (STP).[6]

The current State Pension system

4. Current State Pension provision includes the following components. [7]

BASIC STATE PENSION (BSP)

5. BSP is a contributory, flat-rate benefit. People with a full record of National Insurance Contributions or Credits (NICs) qualify for the BSP when they reach State Pension Age (SPA). The level of a full BSP in 2012/13 is £107.45 a week. The number of qualifying years needed for a full BSP is 30, for people reaching SPA on or after 6 April 2010. Between 2002 and 2011 the BSP was uprated by the higher of the inflation rate (measured by the Retail Price Index (RPI)) or 2.5%. From April 2011, the Government introduced a "triple guarantee" (also known as the "triple lock") that the BSP would rise by the highest of:

  • the average percentage increase in UK wages that year;
  • inflation (measured by the Consumer Price Index (CPI)); or
  • 2.5%.[8]

ADDITIONAL STATE PENSION (ASP)

6. Individuals have accrued entitlement to ASP through:

  • The State Earnings Related Pension Scheme (SERPS) which operated between 1978 and 2002; and
  • The State Second Pension (S2P) which replaced SERPS from April 2002.[9]

SERPS and S2P derive from NICs on earnings between lower and upper earnings limits, or from NI credits. Entitlement can continue to build up throughout working life. S2P is compulsory for the employed (unless they are contracted-out), but not the self-employed. In 2006 the Government announced that S2P would gradually cease to be earnings-related and become paid at a flat rate. The Pensions Act 2007 introduced reforms of S2P, which also served to increase its coverage.

7. Since 1978 it has been possible to "contract out" of the Additional State Pension into a private pension scheme. Where an individual is contracted-out into a Defined Benefit scheme, they and their employer pay lower NICs, reduced by the amount of the "contracted-out rebate". The scheme used for contracting-out has to meet certain conditions. The contracting-out option ended for Defined Contribution (or money purchase) schemes in April 2012.

8. Pensioners with relatively low incomes may also qualify for means-tested support through the Pension Credit (see Chapter 2).

Key features of the Single-tier State Pension (STP)

9. The White Paper stated that the STP would be introduced "in April 2017 at the earliest".[10] However, on 18 March 2013, the Government announced that implementation would be brought forward to April 2016. The Minister said in a letter to the Chair that "the positive response to our proposals has reinforced the need to reform the State Pension as soon as possible to provide a clear foundation for pension saving".[11]

10. The key features of the STP are as follows:

  • Only those reaching State Pension Age (SPA) after the implementation date will be eligible for the Single-tier Pension;
  • It will be set above the basic level of the Pension Credit Standard Minimum Guarantee, currently £142.70 per week for a single person;
  • It will replace both the Basic State Pension and the State Second Pension, and contracting-out will end;
  • The Savings Credit element of Pension Credit will close to pensioners reaching SPA after the implementation of the STP;
  • It will require 35 qualifying years of National Insurance contributions (NICs) or credits for the full amount;
  • There will be a minimum qualifying period of between 7 and 10 qualifying years;
  • It will be based on individual qualification, without the facility to build a pension entitlement based on a spouse or civil partner's NICs, or to inherit or derive such rights;
  • Transitional arrangements will protect the position of those who have a pre-implementation NICs record;
  • People will continue to be able to defer claiming their State Pension and receive a higher weekly amount in return. However, it will no longer be possible to receive deferred State Pension as a lump-sum payment;
  • The STP is intended to cost no more than the current State Pension arrangements.[12]

Our inquiry

11. At the same time as the White Paper and draft Bill were published in mid-January 2013, the Minister for Pensions wrote to the Chair of the Committee formally asking us to carry out the pre-legislative scrutiny of Part 1 of the draft Bill. We were asked to complete this scrutiny by the start of the Easter parliamentary recess (26 March) to enable the Government to take account of our recommendations and then to introduce the finalised Pensions Bill at the beginning of the 2013-14 parliamentary session in May.

12. We issued a Call for Evidence a few days after the draft Bill was published. We received 40 written evidence submissions from a range of organisations, as well as a large number of personal submissions from individuals, setting out how they believed the reforms were likely to affect them. We held three oral evidence sessions with: experts, commentators and organisations representing individuals particularly affected by the reforms; representatives of the pensions industry and employers; and Steve Webb MP, Minister for Pensions. A full list of witnesses is set out at the end of this report.

13. We are grateful to everyone who contributed to this inquiry, particularly as it has of necessity taken place over a very condensed timescale. We would also extend our thanks to the Bill Team and policy officials at the Department for Work and Pensions (DWP) for their assistance with the pre-legislative scrutiny process.

14. Our specialist advisers for this inquiry were Alan Woods and David Yeandle OBE.[13] Their advice and support during the scrutiny process has been invaluable.

Our approach to this report

15. We agreed to the Government's request that we undertake the pre-legislative scrutiny of this important reform. However, the Government has made it very difficult for us to carry out this task effectively. First, we were asked to report our findings to an extremely compressed timetable, to accommodate both the delays in the Government bringing forward its proposals and the Government's intention to introduce the finalised Bill at the start of the next parliamentary session in May 2013. Then, on 18 March 2013, a week before the date specified by the Government for us to conclude our work, and after we had finished taking evidence and our report was largely drafted, the Government announced that the implementation date for the Single-tier Pension was being brought forward by a year, from April 2017 at the earliest, as set out in the White Paper, to April 2016.

16. It is clearly not possible for parliamentary committees to conduct effective scrutiny when the Government makes such a significant change to reform proposals a week before the deadline it has itself set for the scrutiny process to be completed. Nevertheless, we believe that our recommendations remain valid and that it is important that our findings are available to Parliament when it begins its scrutiny of the final legislative proposals for such a major reform of State Pensions. We therefore decided to proceed with publication of our report.

17. Tens of millions of people will be affected by the introduction of the STP. In fact the only people who will not be affected are those who reach State Pension Age before the new policy is implemented. The impacts of the STP are therefore wide-ranging, differ widely between groups in terms of gains and losses, and will affect people in different ways at different stages of the transition.

18. The compressed timetable imposed on us by the Government meant that we had only two months to carry out the whole pre-legislative scrutiny process. It was important to allow interested organisations and individuals time to submit their views to us. This left us about four weeks to hold oral evidence sessions and to draft and agree this report. We have therefore had to limit the scope of this report to the matters we regard as a priority within the Single-tier reform proposals.

19. The STP brings welcome simplicity and clarity but introducing a new system at a single point of time, with set eligibility criteria, also creates a number of "cliff edges" cut-off points where people lose or gain entitlement because of their age at a particular point, their spouse or partner's age or circumstances, or because they just meet or fail to meet a certain eligibility criterion. We therefore decided that this report should consider how potential adverse impacts on particular groups of individuals, and the effects of cliff edges, might be addressed in the legislation.

20. It has not been possible for us to take further evidence on the implications of the earlier implementation date for the STP because the Government announced it after we had completed the evidence-taking for our inquiry. The change is particularly significant for the pensions industry and employers because of the adjustments which they will need to make to workplace pensions schemes to take account of the ending of contracting-out, but it clearly also has implications for many groups of individuals. We consider it imperative, therefore, that the Government carries out a further Impact Assessment of the Single-tier Pension proposals. This should take particular account of the impact of the changed timetable on the pensions industry and employers. The revised Impact Assessment should be published at the same time as the finalised Bill is introduced in May 2013, together with the other additional analyses of impacts and costing of options by DWP which we have indicated are required.

Structure of the report

21. In Chapter 2 we assess the key overall impacts of the reforms. Chapter 3 highlights issues on which clarity about the Government's proposals is needed now. Chapter 4 examines the arrangements for ending contracting-out. In Chapter 5 we assess improvements which might be needed to the Single-tier proposals. In Chapter 6 we explore how the transition to the new system might be smoothed for some of those groups who may be adversely affected or who believe they may lose out.

22. The DWP White Paper, and accompanying documents, provide a detailed description of how the Single-tier Pension and the transitional arrangements will operate. We did not consider it necessary to repeat this detail at length in this Report. The relevant sections of the White Paper and other DWP sources are referenced where appropriate.


1   HC Deb, 16 November 2010, col 726 Back

2   HM Treasury, Budget 2011, Executive Summary, p 4 Back

3   DWP, A state pension for the 21st century: A summary of responses to the public consultation, Cm 8131, July 2011  Back

4   HM Treasury, Budget 2012, HC 1853, March 2012, p 3. See also HC Deb, 9 May 2012, col 3. Back

5   DWP, The single-tier pension: a simple foundation for saving, Cm 8528, January 2013 ("DWP White Paper") Back

6   DWP, Draft Pensions Bill, Cm 8529, January 2013 Back

7   House of Commons Library Standard Note, Single-tier State Pension, February 2013, SN 6525, pp 3-4 Back

8   HM Treasury, Budget 2010, HC 61, June 2010 , paras 1.106-7 Back

9   A predecessor scheme, Graduated Retirement Benefit (GRB), operated between 1961 and 1975 Back

10   DWP White Paper, Executive Summary, p 8 Back

11   Ev 97-99; see also HC Deb, 19 March 2013, cols 43-46WS Back

12   DWP White Paper, Executive Summary, pp 8-9 Back

13   Relevant interests of the specialist advisers were made known to the Committee. The Committee formally noted that Alan Woods declared the following interests: Governor at the Pensions Policy Institute (unpaid); volunteer at The Pensions Advisory Service; consultancy work for the National Association of Pension Funds; specialist adviser at The Pensions Regulator; Fellow at SAMI Consulting; deferred member of Civil Service Pension Scheme; and that David Yeandle declared the following interests: member of NEST Corporation's Employers' Panel; Governor and member of the Council of the Pensions Policy Institute.

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Prepared 4 April 2013