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


6  Smoothing the transition to the new system

139. This chapter looks at ways in which individuals might be helped to understand the necessarily complex and lengthy transitional arrangements for the Single-tier Pension, with a focus on specific groups of people who may potentially lose out as a result of the reforms, or perceive themselves as losing out.

140. Witnesses emphasised that, although the new system will bring very welcome simplification, "it is incredibly complex to get there" because of the length of the transition period, the number of people affected, and the complexity of the existing State Pension arrangements.[158]

141. Otto Thoresen of the ABI drew attention to "the issue of fairness". He said that "everybody accepts that decisions have to be made and balances struck, but it is about sensing that we have gone through a process that made those knowingly and, if there was something seen to be unfair, it was given consideration and dealt with".[159] Malcolm Small of the IoD agreed that, in making a change of this kind "we have to accept that somewhere along the track some people will of necessity lose out". However, the key was "to minimise that number of people and make it as fair as we can in implementation."[160]

142. Otto Thoresen believed that "the challenges will be around the transition", particularly over the first 10 years, when not many people would yet be experiencing the benefits of auto-enrolment: "in the short term we will have to be very careful about how this pans out and how the impact is felt". He said that he was most concerned about the "lower earners" who would have fewer options and were less likely to have other means of support, and might therefore find themselves disadvantaged. He believed that "seeing what can be done for those to manage the transition is very worthwhile".[161] Age UK agreed that DWP might need to do more to support the "transitional generation" to ensure that there was not "a stark difference between people reaching State Pension age before and after the implementation date."[162]

Calculation of the foundation amount for the STP

143. Although the overall aim and effect of the Single-tier will be to simplify State Pension provision, the reform will require complex calculations to be made, to take account of the wide range of accumulated individual entitlement to BSP and Additional State Pension. This calculation will need to be made for everyone of working age—about 40 million people.[163] The only people who will not be affected by transitional arrangements are those who reach SPA before implementation (now expected to be April 2016) and those who have not yet reached working age or have no NI record by this date.

144. The transition process will use an individual's pre-implementation NI record to calculate a Single-tier starting amount based on the rules of the new system. Individuals who have previously been contracted-out will have a deduction applied, to take account of the lower NICs paid whilst they were contracted-out. The Government will then check to see whether the rules of the current system would give a better outcome. If so, that valuation will become that individual's "foundation amount". The White Paper explains in detail how this process will work and provides case studies.[164]

145. People whose foundation amount is less than the full STP will be able to increase their entitlement up to the full level of the STP, at the rate of 1/35th of the full rate (£4.11) for each additional qualifying year they gain before reaching their SPA. People whose foundation amount is higher than the full STP will receive the difference between their foundation amount and the full STP amount as an extra payment (the "protected payment") on top of the full Single-tier weekly amount.[165] The Government estimates that 5% of people retiring between 2017 and 2060 will receive a full STP plus a "protected payment" as a result of having a record of NI contributions of more than the full STP at the time of implementation. This means that they will receive more than the full STP equivalent rate of £144 per week.[166]

REBATE DERIVED AMOUNT

146. In calculating the STP foundation amount for a person who has had periods contracted-out, DWP needs to put a value on the National Insurance rebate they have received or the reduced contributions they have paid in applicable periods for the duration of the Additional State Pension from 1978 to the implementation date for the STP, now expected to be April 2016. The total of this is known as the "Rebate Derived Amount". This will be subtracted from their STP valuation. DWP says that "this approach will ensure that people with periods of contracting out are not able to benefit at a disproportionate rate to others".[167]

147. The ABI wanted the Government to clarify how the Rebate Derived Amount will be calculated. It believes it should be "based on the rebates actually received and not the Additional State Pension foregone, which is likely to have been higher". It argued that the amount allowed needs to be "realistic and ensure that people do not disproportionately lose out as a result of contracting-out".[168] In oral evidence, Otto Thoresen explained that the rebate had been based on "a set of assumptions" that a contracted-out individual would get the equivalent in terms of private pension to the Additional State Pension that they had given up. However, these assumptions "have not proven to be anything like the reality", because of the level of returns on pension investments over the last 10-15 years and the low rates of annuities. He argued that "the one thing that is factually there is the amount of money these people have been given to invest in their personal pension to replace whatever they have given up"—the NI rebate they have received.[169]

148. The foundation amount calculated for each individual will be a key factor in determining how much Single-tier Pension they receive and whether this is more or less than the standard STP rate. For people who have had periods contracted-out of the State Second Pension (and/or SERPS), and who have therefore paid a reduced amount of National Insurance, the DWP will have to calculate how much this rebate is worth (the Rebate Derived Amount). It is important that this amount is calculated in a transparent way that everyone accepts is fair. We recommend that the Government sets out in simple language the basis on which the Rebate Derived Amount will be calculated, so that Parliament can assess the fairness of the approach. We also recommend that a report from the Government Actuary is laid, giving an assessment of the actuarial fairness of the proposed approach.

Derived rights

149. Under the STP, an individual's entitlement will be solely based on their own NI record. In the current system, it is possible to obtain a State Pension based on the contributions of a spouse or civil partner—these are known as "derived rights" and apply in different ways to both Basic and Additional State Pension. The transitional arrangements for derived rights under the STP are necessarily complex, in order to deal with the range of circumstances faced by individuals (and they take up many of the draft Bill clauses). The basic principles are summarised in the White Paper.[170]

STATE PENSION ENTITLEMENT BASED ON SPOUSE'S NI CONTRIBUTIONS

150. Age UK believes that "transitional provisions should ensure that there is protection for everyone who has a legitimate expectation of receiving a pension based on their partner's contributions and will not have sufficient years between implementation and their SPA to be able to accrue a single-tier pension of at least the same amount."[171]

151. Witnesses expressed concern about a particular group of women who were expecting to rely on their spouse's NI contributions to give them a Basic State Pension. This is currently 60% of the BSP while their spouse is alive (£64 a week) and 100% if they are widowed (£107 a week). This will not be part of the new system.

152. Sally West of Age UK believed that it was "really important" that people in the position of expecting to use their husband's contribution records "do not suddenly find they are left without a pension at all". She accepted the need to end derived rights under the STP but believed that, "where people have that legitimate expectation that they would receive a pension on their partner's contributions, it seems very unfair to suddenly say, 'We are changing the rules and you should have done something different for the last 40 years'". This was a short-term issue, because women would build up their own NI records in the STP but "we need protection for people who are heading towards pension age and are not able to change their plans."[172]

153. The Minister stressed that not many women fell into this category: by 2020 "about 30,000 women" will get less under the STP than they would have done under the derived entitlement in the current system. Moreover, many of these women lived overseas and some had never lived in the UK at all, because the entitlement was solely based on the spouse's NI contributions.[173]

154. The White Paper indicates that a solution has already been put in place for another group of women who might have been adversely affected: employed married women who chose to pay reduced rates of NI on the assumption that they would receive a derived pension based on their husband's contributions (known as the Reduced Rate Election (RRE) or, more colloquially, the "married woman's stamp"). The option to do this ended in 1977 but there are still a very small number of women who are paying the RRE. The White Paper makes clear that provision will be made for them under the transitional arrangements:

Where a valid election existed at any point in the 35 years before State Pension age, they will be able to access a single-tier pension based on their own contributions to the point at which the single-tier pension is implemented. This will include an amount equivalent to the full rate of the 'married woman's' lower-rate basic pension or, if widowed or divorced, the full rate of the basic State Pension. If they would also qualify for a single-tier pension based just on their own contributions, they will receive the higher of the two.[174]

155. We welcome the Government's sensible transitional solution to the potential adverse impact on employed women who chose to pay reduced NI contributions under the Reduced Rate Election (or "married woman's stamp") arrangement, on the understanding that they would be able to derive a pension based on their husband's contributions. We believe that it should also be possible to find a solution for another small group of women: those who did not build up their own NI record because they had a legitimate expectation that they would be able to rely on their husband's contributions to give them entitlement to a Basic State Pension. One option might be that women in this position who are within 15 years of State Pension Age should be able to retain this right. We recommend that the Government assesses and publishes the cost of providing this option for the relatively small number of women affected. We believe that, for those further from retirement, there is sufficient time for them to plan on the basis of the new rules.

Women born between 1952 and 1953

156. We received a number of submissions from women in a particular age group, highlighting the dual adverse impact on them of the more rapid increase in their State Pension Age (SPA) to 65 and then 66, and their non-eligibility for the Single-tier Pension. There are two separate cohorts of women who believe they are adversely affected: those born between April 1952 and July 1953; and a smaller subset born between April and July 1953 who believe they will suffer a more severe loss. DWP responded to the concerns raised by these women by conducting and publishing an analysis of their situation.[175]

157. Under the Pensions Act 1995, women's SPA was due to equalise with men's at 65 between 2010 and 2020. The Pensions Act 2007 then legislated for an increase in men and women's SPA to 68 by 2046 in stages:, to 66 over two years starting from April 2024, to 67 over two years starting in April 2034, and to 68 over two years starting in April 2044.

158. In the Pensions Act 2011, the Coalition Government brought forward the increase in the SPA to 66 for both men and women so that the changes occurred between December 2018 and April 2020. To achieve this, the Act also brought forward the increase in women's SPA so that it reaches 65 in November 2018 rather than April 2020.[176]

159. The changes in the 2011 Act meant that women born after 6 April 1953 saw their SPA increase a second time, by between two and 18 months. A group of about 85,000 women born between 6 April 1953 and 5 July 1953 felt particularly aggrieved because they believed they would suffer a double adverse impact, arising from this second change to their SPA, coupled with just missing out on the STP, if the implementation date had been April 2017 (as they would have reached SPA between 6 July 2016 and 6 March 2017).[177] A number of witnesses argued that measures should be put in place to mitigate the impact on this group of women.[178]

160. It appears that the Government's decision to implement the STP from April 2016 instead of April 2017 will address the concerns of the subset of 85,000 women born between April and July 1953. The Government says that the earlier implementation date means that "around 400,000 more people will reach State Pension age under single tier, including every woman affected by the acceleration of the State Pension age equalisation process in the Pensions Act 2011."[179]

161. A larger group of around 430,000 women born between 6 April 1952 and 5 July 1953 are also unhappy that they will miss out on the STP because they reach SPA before it is implemented. Their grievance is that a man born on the same date would be eligible for the STP. However, this is because the man would have had to wait until age 65 to reach his SPA, by which time the reform will have been implemented, whereas the women in this cohort reach SPA between 6 May 2014 and 6 March 2017 when they will be aged between 62 and 63 years nine months.[180] (A subset of these women will now have their grievance addressed by the change to the earlier implementation date of April 2016, as described in the previous paragraphs.)

162. Prof Jay Ginn highlighted that this group of women believed that they would lose out on £36 a week in State Pension, which is the difference between the current BSP of £107.45 and the STP of £144.[181] The Government has emphasised that not all of the 430,000 women would have been entitled to a full STP, for example if they have fewer than 35 qualifying years, or have been contracted-out of the Additional State Pension, and so not all would necessarily have been financially better off under the STP. The DWP analysis shows that the median State Pension valuation in the current system for women in this cohort would be £127 per week and their median valuation in the STP would have been £133 per week, so the median loss is around £6 per week. [182]

163. The Government also pointed out that, while these women would not be eligible for the STP, they would be able to claim their State Pension under the current system between 15 months and three years earlier than a man born on the same date. It estimates that this means that, assuming equal life expectancy at age 65, they could receive between £7,000 and £17,000 more than a man in State Pension over the course of their life, even if they are only entitled to a Basic State Pension of £107 per week. If a woman in this group is also entitled to Additional State Pension (SERPS and S2P), she could receive an additional sum between £8,000 and £20,000, just during the period between reaching her SPA and the date when a man born on the same day reached his SPA of 65.[183]

164. The Minister made clear in oral evidence that it was not the Government's intention to permit these women to gain eligibility to the SPA by deciding to defer taking their State Pension to the same date as a man born on the same day.[184] However, he pointed out that these women already have the option to defer taking their State Pension under the current system. This attracts an increment of 10.4% per year. DWP estimates that 75% of the women in this cohort could receive an entitlement of £144 per week under the current system if they deferred taken their State Pension to age 65.[185] Baroness Hollis endorsed the idea of deferral. She also pointed out that "poorer women, who cannot afford to defer, may remain entitled to Pension Credit".[186]

165. It should also be noted that there are other groups who will be affected by the cliff edge of a specific implementation date in the same way as this cohort of women. These include a number of self-employed people who reach State Pension Age just before STP is implemented and who will miss out on receiving the higher State Pension it will bring, whereas someone who reaches SPA a few days after the implementation date will benefit. As Age UK has acknowledged: "if the single-tier is introduced from a specific date then there will always be a cliff edge".[187]

166. We heard from many women born between 1952 and 1953 who believed that they would suffer a double adverse effect on their State Pension income, arising from the increases in their State Pension Age combined with their ineligibility for the Single-tier Pension, if it was introduced in 2017 as set out in the White Paper. It appears that the Government's decision to bring forward the implementation date of the STP to April 2016 will mean that around 85,000 women born between 6 April and 5 July 1953, whose SPA had been increased a second time in the 2011 Pensions Act, will now be eligible for a State Pension under the new system. However, the change in the implementation date does not appear to bring any of the remaining women in the cohort born between April 1952 and April 1953 within the scope of the STP. We recommend that the Government clarifies whether this is the case, and sets out the range of impacts on the State Pensions of these women, in the revised Impact Assessment for the STP which we have requested that it publishes when the final Bill is introduced.

167. For the women in the 1952 to 1953 cohort who may not be eligible for the STP even with the earlier implementation date, it is in any case far from clear that all of them would have been better off under the STP. We note the option available to them to defer taking their State Pension under the current system. The favourable incremental rate that deferral offers would enable women in this position who can afford to wait a few years to begin claiming State Pension to build up an amount equivalent to the STP. Those who cannot afford to defer taking their pension may be entitled to Pension Credit.

168. It is important that women who are affected by the increases in their State Pension Age understand their individual State Pension circumstances. We believe that this group should be prioritised as part of the overall communications strategy for the STP. We recommend that DWP publish detailed information on its website to help this cohort of women to calculate their State Pension entitlement. This should explain the option to defer taking the current State Pension, and set out the benefits this offers.


158   See for example Q 93 (ABI); Q 113 (NAPF);  Back

159   Q 112 Back

160   Q 154 Back

161   Qs 101-102 and Q 112 Back

162   Q 52 Back

163   Q 253 Back

164   DWP White Paper, pp 11, 14-17 Back

165   DWP White Paper, p 11 Back

166   HC Deb, 11 February 2013, cols 510-11w Back

167   DWP, Single-Tier Transition-Technical Note, January 2013  Back

168   Ev 59 Back

169   Q 117 Back

170   DWP White Paper, Annex 3D Back

171   Ev 56 Back

172   Qs 34-38 Back

173   Qs 177-180 Back

174   DWP White Paper, pp 93-94 Back

175   DWP, Note on the cohort of women born between 6 April 1952 and 5 July 1953, March 2013, available on the DWP website at www.dwp.gov.uk/policy/pensions-reform/state-pension/ Back

176   See House of Commons Library Standard Note, State Pension Age - 2012 onwards, February 2013, SN 6546; DWP Note on the cohort of women born between 6 April 1952 and 5 July 1953, op cit; and Pensions Policy Institute Briefing Note No. 60, What are the implications of the Government's latest legislation increasing State Pension Age, November 2011, Back

177   DWP Note, op cit, Annex A Back

178   See, for example, Q 64 ( Prof Jay Ginn); Q 28 (Dr Ros Altmann); Q 30 (Age UK); Q 26 (TUC); Q 64 (Baroness Hollis of Heigham) Back

179   HC Deb, 19 March 2013, col 43-46WS Back

180   DWP Note, op cit, Annex A Back

181   Q 64 Back

182   HC Deb, 25 Feb 2013, col 359W Back

183   DWP Note, op cit, paras 22-24; see also HC Deb, 25 Feb 2013, col 359W Back

184   Q 187 Back

185   Q 188; see also DWP Note, op cit, paras 18-20 Back

186   Q 64 Back

187   Ev 57 Back


 
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Prepared 4 April 2013