2 Overall impacts of the reform |
Greater simplicity and clarity
23. The Government's Green Paper on State Pension
reform identified "complexity and uncertainty of outcome"
and "high levels of means-testing" as two of the three
key problems with the current State Pension system.
The White Paper says that the simple flat-rate amount that
the Single-tier Pension (STP) will introduce will "provide
clarity and confidence to better support saving for retirement".
24. Many witnesses welcomed the greater simplicity
and clarity that the STP would bring. The TUC stated that simplification
was "an extremely worthwhile objective" and its benefits
should not be undervalued. Carers UK agreed. Dr Ros Altmann believed
that the aims of the policy, in establishing "a simple State
Pension that people understand and can then build on and plan
for" were "important and valid".
Witnesses from the pensions industry agreed that simplicity brought
significant advantages but they also emphasised that the transition
from the old to the new system would necessarily be long and very
Interaction between State Pension
reform and automatic enrolment
25. The Minister emphasised several times in his
oral evidence that State Pension reform and automatic enrolment
into workplace pensions are intended to be complementary policies.
Auto-enrolment implementation began in October 2012 with the largest
employers. The process is due to be completed for all existing
employers by April 2017. By the end of the implementation process,
an estimated 6-9 million people will be saving into a workplace
pension scheme for the first time, or saving more into their existing
scheme. The Government says that "Automatic enrolment will
make pension savings the norm for millions of people". 
However, the Green Paper on State Pension reform made clear that
"automatic enrolment will only succeed if today's workers
feel confident that it will be worth their while saving and if
they understand how much they need to save to fund their aspirations
26. In our report on Automatic Enrolment published
in March 2012, we emphasised the importance of its introduction
being accompanied by State Pension reform. However, at that time
it was still not clear what the Government's timescale or chosen
option for State Pension reform were. We stressed the urgency
of the Government giving clarity on its intentions, to ensure
that individuals could make informed decisions about workplace
pensions and retirement saving and to assist advisers in giving
sound, long-term advice to individuals. We urged the Government
to proceed with its reform of the State Pension without delay
and to introduce its Bill on State Pension reform in the 2012-13
session of Parliament.
27. In bringing forward the Single-tier proposals,
the Government has acknowledged that "complexity within the
current state system means that there remains a concern that some
people newly automatically-enrolled into a pension will not gain
from saving or will not perceive that they will gain." It
highlights that the planned reforms to the State Pension "will
work with automatic enrolment to boost pension-saving among low
and medium earners".
The Minister told us that the STP was "the perfect complement
to the automatic enrolment policy" and that "we see
the two as twin policies". He emphasised that the amount
that people will receive under the STP should be assessed in conjunction
with the additional amount that many people will receive from
their private pension as a result of auto-enrolment.
Pension Credit and reliance on
28. Pensioners with relatively low incomes may qualify
for means-tested support through the Pension Credit. This has
- The Guarantee Credit tops up
weekly income to a "standard minimum guarantee" (£142.70
a week for a single person, £217.90 for a couple, in 2012/13).
Additional amounts are payable in respect of severe disability,
certain caring responsibilities and housing costs. The earliest
age from which it can be claimed is linked to the State Pension
Age for women.
- The Savings Credit aims to provide an additional
amount for those aged 65 or over who have made some provision
for their retirement. The maximum Savings Credit for a single
person in 2012/13 is £18.54 a week.
29. One of the motivations for State Pension reform
is the Government's concern that the "interactions between
Pension Credit and the state pension further increase complexity,
making it more difficult for people to understand what they will
get from the state when they retire, and more difficult to see
the value of saving."
ABOLITION OF SAVINGS CREDIT
30. Pension Credit will continue to be available
under the STP but it will be in a simplified form and Savings
Credit will be abolished. The aim of Savings Credit when it was
introduced was to encourage saving by removing the cliff edge
which had previously meant that those with income above the Basic
State Pension, but below the Standard Minimum Guarantee, had this
income withdrawn pound for pound if their income went above the
basic means-tested sum. The White Paper says that, in practice,
the Savings Credit has broadened the range of pensioners eligible
for means-testing. It highlights that single people with income
of nearly £190 per week may qualify for some Savings Credit.
31. Around 40% of current pensioners are eligible
for Pension Credit but about a third of those eligible do not
claim, which means they lose out on an average of £34 a week.
Total expenditure on Pension Credit in 2010/11 was £8.3 billion.
The most recent Government estimates of take-up of Pension Credit
are for 2009-10 when it was between 62% and 68%, with unclaimed
expenditure totalling between £1.9 and £2.8 billion.
32. The DWP Impact Assessment (IA) of the Single-tier
Pension proposals says that, under the current system, eligibility
for Pension Credit would have been at 15-20% in the mid-2020s
before falling to around 10% by 2060. The introduction of the
STP will mean that eligibility for Pension Credit will be "halved
overnight" and then fall to around 5% by 2060.
33. The TUC believed that reducing dependence on
means-tested support "is perhaps the most significant benefit"
of the STP, particularly because so many people who are eligible
for Pension Credit do not claim it. It also agreed that its introduction
was "crucial to the success of automatic enrolment".
34. The Institute for Fiscal Studies (IFS) highlights
that removal of the Savings Credit "on its own will reduce
the maximum income at which someone will be entitled to means-tested
benefits, and so on its own should reduce means-testing"
Age UK agreed that the number of pensioners claiming means-tested
benefits would fall because Pension Credit would become "less
generous rather than due to a higher State Pension".
In oral evidence, Sally West, Age UK's Income and Poverty Strategy
Adviser, highlighted that "some of the lower earners who
will be worse off [under STP] will be those who lose Savings Credit".
She pointed out that this might mean that some people reaching
pension age just after the reforms were implemented would lose
£18 a week in Savings Credit.
INTERACTION WITH OTHER MEANS-TESTED PENSIONER BENEFITS
35. Pensioners on low income can also claim Housing
Benefit and Council Tax Support. Age UK emphasised that the abolition
of Savings Credit has implications for entitlement to Housing
Benefit and Council Tax Support because the rates are linked.
It argued that the level of the STP, combined with transitional
protection for means-tested support "needs to ensure that
those with very modest incomes reaching SPA in the early years
of the single-tier are no worse off than under the current system".
36. The White Paper states that "similar [means-tested]
support will exist after the single-tier pension is implemented,
though in revised form in accordance with measures set out in
the Welfare Reform Act 2012". It mentions that "for
a transitional period of five years from the implementation of
single tier, support will be retained for those people who may
have received more help with certain housing costs by virtue of
the availability of the Savings Credit under the current system".
However, no further details are provided.
37. We asked the Minister what this transitional
support would mean in practice. He told us that this was intended
to reflect the threshold in Housing Benefit which takes account
of Savings Credit, to ensure that it is not clawed back. He said
that "the risk was, if we scrapped Savings Credit and then
reduced all the Housing Benefit thresholds by that amount as well,
we ended up with a large number of low-income losers, and we felt
that was too brutal". So for a period "of the order
of five years", the element which reflects Savings Credit
will be retained in Housing Benefit premiums. However, the "exact
mechanisms" for the transition at the end of the five years
was still "work in progress".
The Minister also acknowledged that more consideration needed
to be given to how pensioner passported benefits, including those
administered by other government departments, would be dealt with
under the STP.
on low incomes who are entitled to Pension Credit are often also
entitled to other means-tested support, particularly Housing Benefit
and Council Tax support, as well as other passported benefits.
The Government has indicated that there will be transitional protection
for people who would have been entitled to both Savings Credit
and Housing Benefit under the current system. However, the details
of how this will work in practice are not clear. We recommend
that the Government develops and publishes a clear explanation
of how means-tested support, including passported benefits, will
operate under the Single-tier, and of the transitional protection
that will be put in place, in time for consideration of the final
legislative proposals later this year.
Incentives to save
39. As we have indicated, we made clear in our 2012
report on Automatic Enrolment that reform of the State Pension
system would be necessary to support auto-enrolment so that people
could calculate with greater certainty whether it would benefit
them to save into a private pension and what level of saving might
be necessary to achieve the retirement income that they thought
they would need.
Witnesses in this current inquiry have emphasised that clarity
about the amount of income in retirement that the State would
provide is a key element in achieving the policy aim of reducing
means-testing and increasing incentives to save.
40. The Minister for Pensions has said that the State
Pension reforms, "together with automatic enrolment and wider
welfare reforms mean we're giving lower paid people the biggest
incentives to save for a generation. We're making it more worthwhile
for people, particularly those on low incomes, to save for their
old age." The
Government has highlighted that people retiring under the current
system now lose an average of £3 in benefit entitlement for
every £10 they receive in private pension. Under the new
system, people who retire in 2060 will on average only lose just
41. The IFS pointed out that, for those who would
have been eligible for both Savings Credit and Guarantee Credit,
the abolition of Savings Credit will mean that under the new system
they have a marginal withdrawal rate of benefit of 100% for a
given increase in private retirement incomea rise from
the current 40% rate. So for every additional £1 they receive
in private pension saving, they will lose £1 in benefit entitlement.
This may only affect a small minority of pensioners, but the impact
on them may be significant.
42. The IFS acknowledged that having greater certainty
about State Pension entitlement will affect savings behaviour
but points out that "the direction of this effect is ambiguous";
it "may increase incentives to save; it may have the opposite
effect". But it was unlikely to have "a very big effect"
and much depended on individual circumstances, including whether
people lived in rented accommodation and might therefore be entitled
to Housing Benefit.
The Pensions Policy Institute (PPI) agreed that the effect one
way or the other was likely to be relatively small.
43. Both Baroness Hollis and the PPI believed the
most significant effect on savings would be the enhanced ability
of organisations providing advice (such as The Pensions Advisory
Service) to give a clear steer to people about the advantages
of saving into a workplace pension scheme, because of the certainty
and clarity of the STP.
44. The National Association of Pension Funds (NAPF)
and the Association of British Insurers (ABI) agreed that the
simplicity and clarity of the Single-tier would help make it clearer
to people that it paid to save. However, it was not a "silver
bullet": it was a necessary but not sufficient condition
for improving the context for retirement saving.
45. If people are to be encouraged to save into private
pension schemes, it is important that they have confidence in
the way the schemes are administered. The Minister acknowledged
that automatic enrolment and greater reliance in the future by
most people on income from workplace pensions meant that the quality
of the private pension schemes on offer in Defined Contribution
schemes had to be improved to ensure that all the schemes that
people were automatically enrolled into (or automatically transferred
into) were good schemes.
46. We welcome
the Single-tier Pension (STP) as a necessary complement to automatic
enrolment in workplace pensions. We believe that the STP will
give people more clarity about the amount they can expect the
State to provide for them in retirement so that they are better
placed to make decisions about whether and how much to save in
a workplace pension or other private pension. The STP is not,
however, in itself a "silver bullet" solution to the
problem of low saving levels for retirement. Further measures
to encourage private pension saving and to increase consumer confidence
in the pensions industry, including through improved governance
of pension schemes, are also required, particularly in the context
of people being automatically enrolled into workplace pensions.
Earlier education about planning one's retirement income is also
needed and should start in schools, as part of a financial education
curriculum. We will address these issues in our forthcoming report
on governance and best practice in workplace pension schemes.
Winners and losers
47. DWP has published an Impact Assessment (IA) for
the Single-tier Pension.
This showed that, in the short and medium term, the overall impact
of the reform is a more generous State Pension for most people.
The STP will be of most benefit to individuals who would not have
been able to build up much entitlement to State Second Pension
under the current system, particularly women. 
48. In broad terms, the introduction of the STP
will on average have only a modest impact on the State Pension
entitlement of most people, whether they gain or lose. The IA
shows that, although most pensioners who retire in the next 40
years will have increased notional State Pension compared to the
current system, the increases will mostly be small and there will
be some who will also have reduced notional pensions. Most people
who retire in 2060 will be slightly worse off in the single-tier
system, compared to the current arrangements.
49. The chart below summarises the overall position.Chart:
Proportion of pensioners with changed notional State Pension outcomes
under the Single-tier Pension compared to baseline: median weekly
change for those with higher or lower notional outcomes (in 2012/13
Source: DWP Impact Assessment, Chart 3.1
50. Analysis by the IFS and the PPI indicates the
following categories of winners and losers:
- People who have already had
significant periods of low earnings or employment gaps, particularly
women and carers, who were not well covered by SERPS or S2P credits.
- Self-employed people, who will be brought fully
into the State Pension under the new system and are therefore
more likely to receive a higher amount.
- People who were previously contracted-out of
the S2P (and SERPS), particularly those who have time to build-up
more pension after the STP introduction date.
- Individuals who may have been
eligible for Savings Credit.
- Individuals with fewer than 7-10 qualifying years.
- Employees with significant periods contracted-in
who will not be able to accrue any further Additional State
Pension after 2017.
- Younger people who entered the labour market
after 2002, who would have been able to build up high S2P entitlements
under the existing system (because each year of accrual in
the new system will be worth £4.11, compared with £5.05
for low earners and £5.81 for higher earners, under the present
51. Chris Curry, Research Director of the PPI, told
us that the effect of the reforms was essentially a continuation
of the process begun in the 2007 Pensions Act, to equalise income
from the State Pension by extending coverage of the Additional
State Pension. The difference was that this would occur much more
quickly under STP. This more rapid process "helps a lot more
people in the short term" but it would be "less generous
in the longer term than the existing system would have been"
because overall expenditure on State Pensions will be constrained.
The PPI's overall analysis is that individuals who reach State
Pension Age (SPA) in the years just after the introduction of
the reforms will be more likely to benefit from the STP, but those
who are further from their SPA would have been more likely to
have had higher State Pensions under the current system.
52. The IFS's view was more stark: it said that the
"the main effect in the long run will be to reduce pensions
for the vast majority of people, while increasing rights for some
Paul Johnson, Director of the IFS, acknowledged that "there
is a significant additional amount of money going to the earlier
cohort of pensioners" and that "there is a lot of rebalancing
happening in the short run, which is giving significant additional
money to [...] low earners, particularly those who have taken
time out of the labour market before 2002". (2002 was when
the State Second Pension was introduced, which broadened coverage
of the Additional State Pension, including taking account of NI
credits.) But he also highlighted that there would be "a
rebalancing away from the whole of later cohorts, but more from
the higher earners." 
53. The Minister acknowledged that, under the STP,
"some people will get less than they would have done"
under the current system and that by 2060 the Government will
be spending less on State Pensions, with expenditure falling from
an estimated 8.5% of GDP under the current system to 8.1% under
the STP. But he also
pointed out that by 2040 "60% of the lowest-income pensioners
will be getting more" under the new system than if the current
system had just rolled forward.
54. Several witnesses suggested that comparing outcomes
between old and new systems in several decades' time had an element
of artificiality. Chris Curry of the PPI pointed out that some
of the estimates of losses suffered by future pensioners were
based on seeing individuals as "building up less in the future
than they might otherwise have done" had the current system
stayed exactly the same as it is "for the next 50 years".
The Minister and Baroness Hollis made similar points.
55. The overall
impact of the introduction of the Single-tier Pension is that
a significant number of people will receive more State Pension,
mostly in the short to medium term. We welcome this improvement
in State Pension provision, particularly as some of the key gainers
will be women, carers and other people with gaps in their working
lives, who will benefit significantly. The main losers will be
people who are not able to fulfil the minimum qualifying years
requirement and "notional" losers who would have been
able to accrue higher State Second Pension (S2P) in the current
for most people the overall impact, whether they gain or lose,
is likely to be marginal. The reform could be seen as evolutionary
and simply continuing at a faster rate the redistributive effects
of the changes made with the introduction of S2P in 2002, which
widened the coverage of the Additional State Pension and made
it more flat-rate and less earnings-related. Moreover, while the
STP may be higher than the Basic State Pension which some people
would have received under the current system, the net amount some
of them receive in weekly income from the State may be less, because
of the loss of means-tested benefits.
57. The introduction
of the STP, the roll-out of automatic enrolment and further increases
in the State Pension Age will all significantly affect retirement
planning and income, in different ways for different groups over
the long period of transition. We recommend that the Government
carries out and publishes an assessment of the cumulative impacts
of these policies on different population groups, including at
a range of income levels, separately for men and women, at 10-year
intervals over the period to 2060.
14 DWP, A state pension for the 21st
century. April 2011, p 13 ("DWP Green Paper"). The
other problem identified was "significant inequality". Back
DWP White Paper, p 8 Back
Qs 44, 48, 50 Back
Q 101 Back
DWP, Supporting automatic enrolment: A call for evidence on
the impact of the annual contribution limit and the restrictions
on transfers on the National Employment Savings Trust, November
2012, Foreword and Executive Summary, para 1. For the timetable
for auto-enrolment implementation see DWP, Automatic Enrolment
into a workplace pension: key facts, September 2012, p 6 Back
DWP Green Paper, Executive Summary, p 8 Back
Eighth Report of Session 2010-12, Automatic Enrolment and
NEST, HC 1494, paras 30-31 Back
DWP, Enabling and encouraging saving: the evidence around
pension reform and saving, February 2013, p 4; and DWP Press
Release, 14 February 2013, "Government's pension reforms
will give lower paid bigger incentive to save" Back
Qs 158, 227, 232 Back
House of Commons Library Standard Note, Single-tier State
Pension, February 2013, SN 6525, pp 3-4 Back
DWP White Paper, p 24 Back
DWP White Paper, p 24 Back
HC Deb, 14 February 2013, col 774w; see also DWP Annual Report
and Accounts 2011-12, p 134 Back
DWP, Impact Assessment, Single-tier State Pension, January
2013, p 6 Back
Ev 87. In this report, Ev xx is used for references to written
evidence submitted by oral witnesses and printed with this report;
Ev wxx is used for references to written evidence published in
the volume of additional written evidence on the Committee's website
at www.parliament.uk/workpencom Back
Ev 65 Back
Ev 56 Back
Q 52 Back
Ev 56-7 Back
DWP White Paper, Annex 3, para 9 Back
Q 237 Back
Q 227 Back
Eighth Report of Session 2010-12, Automatic Enrolment and
NEST, HC 1494, paras 30-31 Back
See for example Qs 92-93 and 94-97 (ABI and NAPF); Q 126 (IoD) Back
DWP press release, 14 February 2013 "Government's pension
reforms will give lower paid bigger incentive to save" Back
Ev 71 Back
For an explanation of marginal deduction rates and the changes
to them that the Single-tier Pension will make, see DWP, Enabling
and encouraging saving: the evidence around pension reform and
saving, February 2013, pp 18-23 Back
Ev 65 and Qs 70-71 Back
Q 73 Back
Qs 69 and 73 Back
Qs 94-5 Back
Q 270 Back
DWP Impact Assessment, Single-tier State Pension, January 2013 Back
DWP Impact Assessment, Chart 3.1, p 17 (reproduced in para 49
of this report) Back
DWP Impact Assessment, Chart 3.1, p 17 Back
IFS Observations, January 2013 "Welcome simplification of
state pensions but younger generations lose" and Ev 77 Back
Q 58 Back
Ev 77 Back
IFS Observations, January 2013 "Welcome simplification of
state pensions but younger generations lose" Back
Q 58 Back
Qs 159 and 234. See also DWP White Paper, p 12 and Impact Assessment,
p 6 Back
Q 235 Back
Qs 57 and 236 Back