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

3  Issues on which clarity is needed now

Balance between detail set out in primary and secondary legislation

58. The Explanatory Notes to the draft Bill explain that most of the provisions "will be brought into force by means of commencement orders made by the Secretary of State", in the usual way for primary legislation.[58] The Government's intention is to introduce the Pensions Bill containing the STP provisions at the beginning of the 2013-14 parliamentary session in May. The expectation is that the Bill will complete its parliamentary stages and obtain Royal Assent by spring 2014.[59]

59. As with much proposed legislation, many details are not included on the face of the draft Bill but will be specified in subsequent Regulations. These details include:

  • the commencement date for the STP;
  • the minimum number of qualifying years which will be required (although the White Paper indicates that this is likely to be between 7 and 10 years, and 10 years is used for modelling purposes in the White Paper); and
  • the starting level rate of the STP (although £144 per week is used in the White Paper for illustrative purposes).

60. The PPI acknowledged that, in proposed primary legislation, there was "always the trade-off between flexibility for implementation and certainty as to what is going on". However, it believed that leaving so much detail to Regulations meant that it would take longer for people to get the certainty they needed to help them to plan and that this:

[...] does also make analysis of the implications of the Bill quite difficult, because quite small changes, potentially in, for example, the level of the benefit or the indexation arrangements, could have quite significant implications on the number of people who gain or lose at any one particular point in time or the types of groups who end up being gainers or losers.[60]

61. Citizens Advice made a similar point, arguing that, without this greater clarity, "the same difficulties in predicting retirement income will be maintained until the regulations are set, with consequential impacts on preparing for retirement for those approaching pensionable age."[61] Sally West of Age UK said that, although they would not expect key details necessarily to appear on the face of the draft Bill, "they will be really crucial as to whether the reforms achieve the Government's aims" and it was important to have clarity on them now.[62]

62. The pensions industry and employer representatives took a different view. They believed that the right balance had been struck between the content of the draft Bill and what would be in secondary legislation. Previous examples of primary pensions legislation, notably the automatic enrolment legislation, had attempted to put too much in primary legislation which reduced the flexibility to make the changes which it became apparent were necessary once implementation began. The Institute of Directors (IoD) believed that the draft Bill was the right sort of enabling primary legislation "which then buys us, the stakeholders, time to work through with DWP to ensure the secondary is as robust and fair as it possibly can be".[63]

63. The Minister confirmed that most of the draft Regulations would not be available until much nearer the date of implementation. [64] However, we understand that the ones relating to contracting-out are likely to be published in the summer, for Committee stage of the final Bill, because of the implications for the pensions industry and employers.

64. Much of the detail of the Single-tier Pension proposals will be set out in Regulations rather than being contained in the primary legislation. We understand the need for flexibility in this respect and the risk involved in Parliament agreeing primary legislation which is too prescriptive and which then has to be amended by further primary legislation. However, a proper assessment of the reforms, by Parliament and stakeholders, will not be possible until the detailed arrangements are finalised and published. The Government's announcement on 18 March that the implementation date for the STP is to be brought forward by a year makes it even more urgent that the draft Regulations are published as soon as possible, particularly those on the detailed arrangements for ending contracting-out which have major implications for pension schemes and employers.

Implementation date

65. The White Paper says that "the Government intends to implement the single-tier pension in April 2017 at the earliest".[65] In oral evidence on 11 March, the Minister told us that he would be "astonished" if the planned implementation date of April 2017 slipped and that he "would hope to be in a position to be definitive about the start date before we bring the Bill to the House" in May 2013. He acknowledged that pension schemes, in particular, needed certainty about the start date. [66] The Minister also told us that he did not plan to put the implementation date on the face of the Bill: he believed that the Government needed to retain the flexibility to set a different implementation date if this proved necessary because of circumstances that could not be foreseen three years ahead. He said: "You cannot bind a subsequent Parliament anyway, so it would not add a great deal to the certainty. If a future Parliament wanted to stop this, they could do it in a day".[67]

66. We were therefore very surprised when, only a week later, on 18 March, the Minister informed us that the implementation date for the STP would be brought forward by a year, to April 2016.[68]

67. In his oral evidence to us on 11 March 2013, the Minister gave a very clear indication that the April 2017 implementation date for the STP was fixed. He agreed then that it was very important for stakeholders, particularly pension schemes, to have certainty about the start date. We were therefore very surprised when, a week later, he announced that implementation was to be brought forward by a year to April 2016. We had already decided that the implementation date was one of the key features of the reforms which needed to be set out on the face of the Bill. The Government's decision to make this major change, which has significant implications, at this very late stage of the scrutiny process, makes the case for this even stronger. We therefore recommend that the new implementation date of April 2016 is set out on the face of the Bill, to give the public, the pensions industry and employers the certainty they need about when this major change affecting so many people will happen. Given the likelihood that any delay in implementation, no matter how small, would cause a significant impact on retirement income for the groups which face a cliff edge, including the implementation date in the primary legislation would provide greater assurance that the planned start date will be met.

Minimum number of qualifying years

68. Clause 2 of the draft Bill sets out that entitlement to the Single-tier Pension will be subject to a minimum number of qualifying years (known as the "de minimis"), to be specified in Regulations. DWP says that the exact number of minimum years required will be decided "shortly before implementation" but has indicated that it will be set at between seven and 10 years. This qualifying period is intended "to ensure that state pension expenditure is targeted at those who make a significant economic or social contribution to the country." The White Paper uses 10 qualifying years as the minimum requirement for modelling purposes.[69]

69. The IFS describes the group affected by the 7-10 year requirement as "probably the greatest losers" as they will receive no State Pension at all under the new system whereas they could have been entitled to up to £32.76 per week BSP under the current system.[70]

70. The DWP Impact Assessment identifies the following key impacts from the 7-10 year requirement:

  • Numbers affected and savings in the early years of the policy are expected to be relatively low (rising from zero to around 35,000 people in 2020).
  • In 2040 it is estimated that around 380,000 people with a GB State Pension living overseas could be affected.
  • The expected savings from the de minimis condition in 2040 are around £600 million in 2012/13 prices.[71]

71. The Minister told us that the difference between the numbers affected if the minimum was fixed at 10 years rather than seven was "quite marginal" in terms of "GB residents". He acknowledged that the de minimis would have an impact on a number of "people who do not live here at all", but believed that many of these would be in the category of the "Aussie bar-worker" who obtained a few years of NI contributions in the UK and then "never comes here for 40 years".[72] DWP subsequently provided additional details about the impact of the minimum qualifying years requirement.[73]

72. We believe that it is appropriate for a minimum qualifying threshold to be set for the Single-tier Pension. The draft Bill does not specify the minimum number of years required for eligibility, although the White Paper indicates that this will be set between 7 and 10 years. We understand the need for flexibility in setting the minimum number of qualifying years. However, there is nothing in the draft Bill as it stands to prevent the Government of the day deciding to set the requirement at more than 10 years. We recommend that the Bill specifies that the minimum number of qualifying years will be "not more than 10 years".

73. There are a number of people who may currently be expecting a State Pension of up to £35 a week under the current system but who will get nothing in the new system because of the 7-10 years qualifying requirement. Those closest to retirement are of the greatest concern as they have less time to make alternative provision. The Government should set out clear proposals, as part of its communications strategy, for ensuring that people affected are informed of the implications, to enable them to plan ahead, including deciding whether it is appropriate for them to make voluntary National Insurance Contributions.

74. We discuss the DWP communications strategy for the STP below. National Insurance contributions and crediting arrangements are covered in Chapter 5.

Communications strategy

75. Witnesses stressed that effective communications would be key to the success of the Single-tier Pension, to ensure that it is well-understood and to establish trust in the new system. It is not yet clear what the main characteristics and timescale for the different elements of the DWP's communication strategy for the new State Pension will be.

76. Aegon believed that "the changes need to be communicated effectively and widely understood in order for any beneficial impact in terms of encouraging private saving to be realised."[74] EEF's view was that:

[...] the Bill should make more explicit provision for the Government to take on a central role in communicating the changes. The transition is a vital one and a clear commitment to meeting the communications challenges should be central to the project, and not one subject to the generic departmental funding pressures prevailing at the time of launch.[75]

The ABI said that "Adequate communication of the change will be essential, or the clarity and simplicity of the new system could be undermined. No-one should feel unclear about the amount they will receive—and therefore the need to save personally themselves".[76]

77. Witnesses emphasised that it was important for the communications strategy to help the public to understand both the overall impact of the changes and what they will mean in terms of individual entitlement. Sally West of Age UK said that "we are finding a lot of people are understandably confused". Many people wrongly believed that introduction of the STP would mean that everyone would receive a State Pension of £144 per week (rather than the current £107) because they did not yet understand the eligibility criteria for entitlement to the full amount. Others were concerned that means-testing was going to end, or that, if they were entitled to more than £144 under the current system, they would lose this. The implications of having been contracted-out, or simply not knowing whether you had been contracted-out or not, was another area of confusion. It was therefore important to "ensure that people have full information about their own future entitlement as well as a reasonable understanding of the reforms".[77]

78. A number of witnesses emphasised that good communications were particularly important, given that the transition would be so complicated. Otto Thoresen of the ABI highlighted that, although the system would be simpler in the end, the transition "gets complicated quite quickly as you work through the permutations". He believed that "finding a way to make that understandable to people so they can trust it is probably the hardest thing in the current environment". He emphasised that the initial implementation period was crucial: "because if we can get the messages right there the longer-term communications should be easier". He also stressed the importance of the new system being perceived as fair by the public. Joanne Segars of the NAPF echoed the view that "there has to be a very carefully managed communications exercise to make sure we can get over these transitional issues" as this was the area of greatest complexity. [78]

79. Representatives of the pensions industry and employers recognised that they had a role to play in ensuring that the new system was properly communicated. Malcolm Small of the IoD said "there is a role for all stakeholders in this, which include organisations such as the CBI and IoD".[79] The NAPF recommended that the Government bring all the key parties together to agree how communications should be co-ordinated. Joanne Segars argued that the earlier the strategy could be sorted out, the better; if DWP waited until all the detail expected in the secondary legislation was available "we simply will not have the time."[80]

80. The Minister pointed out that governments were not permitted to spend money on communications campaigns for policies which had not yet been approved by Parliament and highlighted the importance of providing information that was accurate and definite, rather than subject to change. However, he emphasised that the Government was not "complacent" about this and accepted that "there is an awful lot more communication still to be done". He explained that DWP was looking at web-based options for enabling people to calculate the effect on their STP entitlement of working extra years or making additional NI contributions.[81]

81. The Minister believed there was scope for combining the information people received on the STP with information about their auto-enrolment pension in a similar way to the combined State and company pension information which some employers already provide. He was clear, though, that the Government did not plan to write to all 40 million working-age people at the time of STP implementation to inform them about their STP "foundation amount" entitlement (see Chapter 6).[82]

82. We agree with witnesses that an effective DWP communications strategy is key to the Single-tier Pension achieving its aims. There is already evidence of confusion about the impact on individuals, with some people believing that everyone will automatically be entitled to £144 a week, and others fearing that they will lose any higher State Pension entitlement they may have built up. Many people do not know whether they are or ever have been contracted-out so are unable to assess the implications for themselves of its abolition. We understand that governments are limited in the resources they can allocate to communications before a policy has been approved by Parliament. Nevertheless, we believe that the significant task of providing accurate and understandable information to the public should begin as soon as possible.

83. We recommend that publication of the Pensions Bill containing the State Pension reform proposals at the start of the next parliamentary session is accompanied by the publication of the high-level DWP communications strategy for informing the public about the reforms. The urgency of ensuring an effective strategy is in place has been increased by the Government's decision to bring forward the implementation date by a year. We recognise that some of the detail will come later, but believe that this high-level strategy should set out the timing for each stage of the communications process, and the broad approaches to be adopted for different groups of individuals. The strategy should also include targeted material to alert people who may lose out under the new system and provide clear advice on any action they can take to avoid thisfor example by making voluntary National Insurance Contributions.

58   Draft Pensions Bill, p 116 Back

59   Q 190 Back

60   Q 54 Back

61   Ev w14 Back

62   Q 3 Back

63   Qs 119, 124 and 127 Back

64   Qs 264-8 Back

65   DWP White Paper, Executive Summary, p 8 Back

66   Qs 165 and 269 Back

67   Qs 165-169 Back

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

69   DWP Impact Assessment, para 11 and DWP White Paper, p 29 Back

70   Ev 69 Back

71   DWP Impact Assessment, para 90 Back

72   Q 183 Back

73   Ev 97-98 Back

74   Ev w1 Back

75   Ev w18 Back

76   Ev 59 Back

77   Ev 55 Back

78   Q 110-112 Back

79   See Qs 113-114 and 124-125 Back

80   Q 113-114 Back

81   Qs 248-9, 251 and 257 Back

82   Qs 254-5 Back

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Prepared 4 April 2013