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


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.[14] 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".[15]

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".[16] 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 complex.[17]

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". [18] 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 for retirement".[19]

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.[20]

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".[21] 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.[22]

Pension Credit and reliance on means-tested benefits

28. Pensioners with relatively low incomes may qualify for means-tested support through the Pension Credit. This has two elements:

  • 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.[23]

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."[24]

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.[25]

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.[26]

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.[27]

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".[28]

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"[29] 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".[30] 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.[31]

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".[32]

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".[33] 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".[34] 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.[35]

38. Pensioners 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.[36] 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.[37]

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."[38] 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 over £1.[39]

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 income—a rise from the current 40% rate. So for every additional £1 they receive in private pension saving, they will lose £1 in benefit entitlement.[40] This may only affect a small minority of pensioners, but the impact on them may be significant.[41]

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.[42] The Pensions Policy Institute (PPI) agreed that the effect one way or the other was likely to be relatively small.[43]

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]

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]

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]

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.[47] 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]

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]

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 earnings terms)


Source: DWP Impact Assessment, Chart 3.1

50. Analysis by the IFS and the PPI indicates the following categories of winners and losers:

Winners

  • 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.

Losers

  • 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 system).[50]

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.[51] 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]

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 particular groups".[53] 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." [54]

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.[55] 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.[56]

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.[57]

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 system.

56. However, 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

15   DWP White Paper, p 8 Back

16   Qs 44, 48, 50 Back

17   Q 101 Back

18   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

19   DWP Green Paper, Executive Summary, p 8 Back

20   Eighth Report of Session 2010-12, Automatic Enrolment and NEST, HC 1494, paras 30-31 Back

21   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

22   Qs 158, 227, 232 Back

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

24   DWP White Paper, p 24 Back

25   DWP White Paper, p 24 Back

26   HC Deb, 14 February 2013, col 774w; see also DWP Annual Report and Accounts 2011-12, p 134 Back

27   DWP, Impact Assessment, Single-tier State Pension, January 2013, p 6 Back

28   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

29   Ev 65 Back

30   Ev 56 Back

31   Q 52 Back

32   Ev 56-7 Back

33   DWP White Paper, Annex 3, para 9 Back

34   Q 237 Back

35   Q 227 Back

36   Eighth Report of Session 2010-12, Automatic Enrolment and NEST, HC 1494, paras 30-31 Back

37   See for example Qs 92-93 and 94-97 (ABI and NAPF); Q 126 (IoD) Back

38   DWP press release, 14 February 2013 "Government's pension reforms will give lower paid bigger incentive to save" Back

39   ibid Back

40   Ev 71 Back

41   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

42   Ev 65 and Qs 70-71 Back

43   Q 73 Back

44   Qs 69 and 73  Back

45   Qs 94-5 Back

46   Q 270 Back

47   DWP Impact Assessment, Single-tier State Pension, January 2013 Back

48   DWP Impact Assessment, Chart 3.1, p 17 (reproduced in para 49 of this report) Back

49   DWP Impact Assessment, Chart 3.1, p 17 Back

50   IFS Observations, January 2013 "Welcome simplification of state pensions but younger generations lose" and Ev 77 Back

51   Q 58 Back

52   Ev 77  Back

53   IFS Observations, January 2013 "Welcome simplification of state pensions but younger generations lose" Back

54   Q 58 Back

55   Qs 159 and 234. See also DWP White Paper, p 12 and Impact Assessment, p 6 Back

56   Q 235 Back

57   Qs 57 and 236 Back


 
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Prepared 4 April 2013