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


List of Conclusions and Recommendations


In this List, conclusions are set out in plain type and recommendations, to which the Government is required to respond, are set out in italic type.

Our approach to this report

1.  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. (Paragraph 15)

2.  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. (Paragraph 16)

3.  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. (Paragraph 19)

4.  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. (Paragraph 20)

Overall impacts of the reform

Pension Credit and reliance on means-tested benefits

5.  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. (Paragraph 38)

INCENTIVES TO SAVE

6.  We welcome the Single-tier Pension 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. (Paragraph 46)

WINNERS AND LOSERS

7.  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. (Paragraph 55)

8.  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. (Paragraph 56)

9.  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. (Paragraph 57)

Issues on which clarity is needed now

Balance between detail set out in primary and secondary legislation

10.  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. (Paragraph 64)

Implementation date

11.  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. (Paragraph 67)

Minimum number of qualifying years

12.  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". (Paragraph 72)

13.  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. (Paragraph 73)

Communications strategy

14.  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. (Paragraph 82)

15.  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 this—for example by making voluntary National Insurance Contributions. (Paragraph 83)

Ending of contracting-out

Impact on Defined Benefit (DB) pension schemes

16.  The Government's decision to bring forward the implementation date for the Single-tier Pension after we had finished taking oral evidence and within a week of the deadline for us completing the scrutiny process meant that it was not possible for us to seek the views of employers and the pensions industry about the implications for them of this major policy change. However, it is self-evident that having one year less to prepare for the ending of contracting-out will impose a significant burden on both groups of stakeholders. Having previously appeared to listen and respond to the concerns of pension schemes and employers about the impact of the STP, the Government has now sprung this earlier implementation date on them. We believe it is therefore the Government's clear responsibility to work with these key stakeholders to ensure that the transition to the ending of contracting-out is as smooth as possible and that already beleaguered Defined Benefit private sector occupational schemes do not suffer further adverse consequences. (Paragraph 97)

Impact on employees

17.  We accept that, on average, employees who were previously contracted-out will not lose out in the longer term from having to pay increased National Insurance and pension scheme contributions, because most will gain enough in increased State Pension to compensate for this. However, within this average, some individual employees could lose out and some may face difficulties in the shorter term, especially if current wage restraints continue. We recommend that the Government undertakes more analysis of which employees might fall into this category, so that Parliament can properly consider what measures, if any, might be put in place to limit losses. (Paragraph 103)

Further improvements which need to be built into the new system

National Insurance issues

18.  It is important that people are given the opportunity to build up a full entitlement to a State Pension, given that the number of qualifying years required for this will increase from 30 to 35. We welcome the Government's willingness to look at how the system of National Insurance credits might be improved, by providing more prompts to people who have incomplete records to take up credits if they are carers or are in other circumstances which give them a crediting entitlement. However, any system which relies on individuals being aware of this facility is likely to exclude many of the people it is intended to help. We are pleased that the Government plans to use the introduction of Universal Credit to widen the scope of the NI crediting system for people claiming benefits and to more fully automate it. (Paragraph 117)

19.  People in multiple low-paid jobs which all fall below the Lower Earnings Limit do not currently build up a National Insurance record. We accept the Minister's assurance that many of these people, mainly women, often receive NI credits because they meet the relevant criteria. However, DWP estimates that around 20,000 people in this situation do not receive NI credits or make NI contributions. We support the Government's changes under Universal Credit which will mean that many multi-job low-earners are brought within the scope of NI credits, including through the new facility for both partners to receive credits on the basis of a household entitlement to Universal Credit. This is particularly important as the facility to derive State Pension entitlement through a spouse or partner's NI contributions will no longer exist under the STP. (Paragraph 118)

20.  We welcome HM Revenue & Customs' acknowledgement that people will require additional time to assess their need to make voluntary National Insurance Contributions (VNICs) around the time of the introduction of the STP, particularly as the implementation date has now been brought forward by a year. The usual six-year period during which it is normally possible to make voluntary NICs has been extended so that VNICs for the years 2006-07 to 2015-16 can be made at any time up to April 2023. We regard this as a very sensible measure which will be of considerable assistance to many people. However, people will need help to understand the implications of the transition to the STP, and many may not immediately appreciate the need to build up more years in their NI record under the new system and in their own right. We therefore recommend that the DWP communications strategy for the STP includes specific provision for a joint campaign with HMRC to publicise this extended opportunity to build up a full NI record. (Paragraph 119)

Self-employed

21.  Self-employed people are one of the key groups to benefit from the introduction of the Single-tier Pension, as they will be brought fully into the State Pension system. We recognise the principle that this might mean they should pay the equivalent in National Insurance Contributions that employed people will pay. However, we believe that this change should be considered as part of a wider review of how National Insurance could now be simplified. (Paragraph 124)

Setting and maintaining the differential between STP and Pension Credit

22.  One of the key elements of the Single-tier Pension is that it will be set above the rate for means-tested support, to ensure that incentives to save into a private pension are clear and to complement the aims of automatic enrolment. We believe that the requirement for the level of the STP to be higher than the Pension Credit Guarantee rate is a fundamental principle of the reform. We therefore recommend that this principle is set out on the face of the Bill. (Paragraph 132)

23.  The indicative starting rate of the STP at £144 per week is less than 1% above the Pension Credit guarantee rate, a much lower differential than was proposed in the Green Paper. We accept that the effect of the Government's triple-lock is that the STP may increase more quickly in value than Pension Credit, because the STP will be triple-locked and increase each year by the higher of earnings, inflation or 2.5%, whereas Pension Credit will be indexed to earnings inflation. We also accept that pensioner income from the STP will be increasingly complemented for many people by private pensions saving, including from automatic enrolment. (Paragraph 133)

24.  There is no certainty about how long the triple lock will be in place and we believe that it is important that there is as much clear water as possible between the rate of the STP and that of Pension Credit. There appears to be scope for a bigger differential (either at the outset or over time) given the increased National Insurance revenue that the Government will derive from the ending of contracting-out and the overall long-term savings which will be made on State Pension expenditure as a result of the introduction of the STP. We therefore recommend that, when the Bill is before Parliament in the summer, the Government publishes an analysis of (a) the cost of setting the STP rate at a range of higher levels; and (b) the level at which the STP could be funded if the additional NI revenue was used for this purpose. (Paragraph 134)

Uprating of State Pension for UK pensioners living in countries where it is currently frozen

25.  We understand the frustration of UK pensioners living in countries where their UK State Pension is not uprated. The fact that these pensions are frozen in countries including Australia, Canada, New Zealand and South Africa, but are uprated in many other countries, is clearly an anomaly. While the introduction of the STP presents an opportunity to remove this anomaly, any change would only apply to those reaching State Pension Age after the STP implementation date. Any decision on the situation of those who are already claiming a UK State Pension overseas which is not uprated would need to be taken separately and on its own merits. (Paragraph 138)

Smoothing the transition to the new system

Calculation of the foundation amount for the STP

26.  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. (Paragraph 148)

Derived rights

27.  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. (Paragraph 155)

Women born between 1952 and 1953

28.  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. (Paragraph 166)

29.  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. (Paragraph 167)

30.  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. (Paragraph 168)



 
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