Pensions Bill

Written evidence from GMB (PB 31)

SUMMARY

1. GMB welcomes reforms to simplify the state pension system and to move away from the system of means tested pensioner benefits. However we have a number of concerns about the content of the Bill which will be set out in the submission.

2. We are deeply concerned at the impact of the end of contracting out and believe that this system could be retained in some format. We are equally concerned at the consequential moves to over-ride protections and allow employers to implement change without recognition of these.

3. GMB continues to reject changes that will see the state pension age increase from its current level until policies are introduced to redress the imbalances in life expectancies that persist in society. This inequality should be considered as part of the proposed review, along with a number of other measures that are set out in paragraph 21.

4. GMB believes that reforms predicated on no extra spending on old age benefits cannot be supported as the pension system is in need of a cash boost from public finances. The fact that long term expenditure savings are predicted along with extra revenue from a potentially greater National Insurance yield means that the provisional level of single tier pension should be increased. Current pensioners are also in need of a cash boost to their state pension income.

INTRODUCTION

5. GMB is the UK's third largest union representing 620,000 members. Our members work in both public and private sectors and are covered by the full range of occupational pension arrangements. We also have an active section of retired members many of whom are currently in receipt of a state pension.

6. GMB policies are formulated at our annual member led Congress. Our recent Congress, at the beginning of June 2013, saw a number of motions and speakers raising concerns with the proposed state pension reforms.

THE INTERACTION WITH OCCUPATIONAL PENSIONS

7. GMB recognises that the Government’s proposal for simplification of state pension provision includes the abolition of the second tier (State Second Pension). A major consequence of this abolition is the ending of contracting out (Clause 24 and Schedule 13) and the rebate of National Insurance for both employees and employers of contracted out, defined benefit pension schemes.

8. GMB would question whether such a move is completely necessary, and believes that a form of contracting out (or reduced accrual) under the single tier proposals could be developed. This might include building up a proportion of the single tier pension for years of contracted out service, in exchange for a rebate of National Insurance contributions.

9. The principle of retaining some ability to contract out (or equivalent) is, in GMB’s view, vital for the continued provision of quality defined benefit provision.

10. The ending of the current rebate will result in additional expenditure for both employees and employers – 1.4% of banded earnings for employees and 3.4% for employers. This increase in National Insurance will cost about £6bn pa, with the majority of this having to be found by public sector employers and employees. We are deeply concerned about the ability of employees and employers to fund these increases following a period of protracted wage stagnation, increasing occupational pension costs and with severe restrictions being placed on public spending.

11. Chapter 3 of the White Paper covers this and introduces the Government’s intention to ease the mechanisms applying to some employers seeking to apply detrimental changes to pension schemes. These easement powers are outlined in Schedule 14 of the Bill.

12. In many occupational pension schemes, employers have the sole power to enforce changes to pension terms (for future accrual). In other such schemes employers will have to obtain the agreement of scheme trustees. Some schemes will require the collective consent of a proportion of active scheme members to bring about such changes, as a consequence of protections that were negotiated at the time of privatisation of various industries. Finally, members of some privatised industries are covered by "Protected Persons" status, the legislation which DWP has also launched a separate consultation on.

13. The powers outlined in Schedule 14 seek to diminish any requirements to obtain consent for changes. GMB strongly rejects such a move, and cannot understand the rationale for applying this. The protections relating to member consent and Protected Persons were given as long term assurances to those who have sought to take responsibility for their retirement savings and were accepted by employers operating in the relevant industries at that time.

14. A view may exist that such protections offer too much control for pension provision to employees. GMB has experience in recent years of a number of instances of detrimental changes being agreed where members who are subject of either Protected Persons legislation [1] or who are required to consent to rule changes [2] . Conversely we are not aware of any situations whereby an employer seeking to make changes has been blocked from doing so by these protections. Rather these employers have sought to enter into a reasoned dialogue with staff and negotiate change with representatives. GMB would wish to see this approach maintained and no carte-blanche given to employers to enforce change without meaningful dialogue. Given that the costs associated with the abolition of contracting out will not fall solely on employers, it is likely that employees will also seek to re-examine the deductions made from their take home pay. This is particularly true in areas which have seen protracted wage stagnation and increasing costs of pensions to members.

15. The ultimate rationale for seeking to apply this over-ride is due to an increase in National Insurance, through the loss of the rebate. GMB is mindful that no such powers were considered necessary when National Insurance rates were raised in 2011 or 2003; or in 1999 when the system of employers’ National Insurance was reformed. As such we can not accept the rationale for an over-riding power now.

16. In any event, the focus on restricting these powers is on the extent to which an employer may seek to reduce its costs by more than the potential increase in National Insurance costs. The perceived expectation is that any loss in occupational scheme benefit permitted by the proposed over-ride, would be at least offset by an increase in state pension income. GMB has not seen any evidence to reassure us that members would be better off if these reforms were allowed. If the powers were to prevail, we would suggest that the restrictions outlined in Clause (2) of Schedule 14 should be extended to ensure that members should not face a reduction in total income from their normal pension age.

17. GMB would ideally like to see the reform proposals adjusted to allow for a continued system of contracting out/reduced accrual in exchange for the retention of the National Insurance rebate. Consequently Clause 24 and Schedules 13 & 14 should be deleted. In any event Schedule 14 should be deleted.

STATE PENSION AGE

18. GMB has consistently rejected previous proposals to raise the state pension age, including that outlined in Clause 25; and we will continue to do so in the presence of significant variations in life expectancy. Details of inequalities in life expectancy are highlighted in the ONS Pensions Trends document "Life Expectancy and Healthy Ageing" [3] . This document highlights the range of life expectancies across regions (see Table 3.7) and social class (see Pages 6 & 7).

19. With regard to Clause 26, we welcome the apparent move to consider a report into "other specified factors" (other than life expectancy). However GMB feels that the remit of the person or persons conducting any review should be extended to ensuring that the least well-off in society, who will be most reliant on state pension income, are given greatest regard in assessing the impact of state pension ages.

20. The wording of clause 26 allows for significant deviation from what would otherwise be an important principle in considering the impact of longevity increases. Government has specified that a proportion of adult life approach as a first basis for setting state pension age is appropriate. However no indication of what an appropriate proportion is has been given. Furthermore no explicit definition of when a person reaches the specified age for entering "adult life" has been given. Clarity and debate on these issues is much needed to lend any credence to the Government’s proposal.

21. We oppose the increase set out in Clause 25 and would wish to see this deleted, but would rather favour the principle of informed reviews that are alluded to in Clause 26. In this clause GMB would propose a number of new sub-clauses to clarify and enhance the review mechanism:

[line 34, page 13] delete the word "specified" from sub-paragraph 26(5)

[line 36, page 13] insert new clause 26(6): "The factors relevant to the review include:

a. The range of life expectancies persisting across the UK averaged by gender, socio-economic class and region

b. The change in life expectancies experienced by the decile of the population with the lowest life expectancies,

c. Analysis of the reliance on state pension income of that group compared with other sources of income,

d. Whether flexibility of early access to an actuarially reduced level state pension should be introduced,

e. The minimum period of notice that should be offered to individuals of changes to their State Pension Age

f. The economic impact of extending the labour market, and

g. Other factors specified by the Secretary of State as relevant to the review.

EXPENDITURE

22. Although not a direct feature of the Bill (but rather a matter for Regulations to determine), it is appropriate to comment on the level of state pension that is being proposed under reform. At present, 6.9% of GDP is spent on pensioner benefits, compared with an average 8.4% across the OECD [4] . Under the present system this expenditure was due to rise to 8.5% in the UK by 2060 (compared to 11%+ averaged across OECD countries). However these reforms, rather than being expenditure neutral, will see long term expenditure decrease to 8.1% by 2060.

23. This low level of expenditure remains a matter of great concern to GMB for both today’s pensioners and those retiring under the proposed new system. Despite current economic constraints it is imperative that more is done to raise both the level of the Basic State Pension today and the indicative level of Single Tier State Pension.

24. For many low earners today, the reforms which are already being implemented to the State Second Pension would be likely to offer an improved level of benefit than the indicative Single Tier State Pension level of £144 pw. It is important that this level of benefit should be somehow replicated.

25. Clause 3(1) indicates that the actual level of Single Tier State Pension should be specified in regulations. GMB proposes that this clause is supplemented by saying that the level should not be less than the entitlement under the present system, for an individual earning in line with the Lower Earnings Threshold, to Basic and State Second Pension for a person with at least 35 qualifying years.

TRANSITIONAL IMPACT – REDUCTION IN S2P/SERPS REVALUATION

26. Schedule 1 of the Bill covers how transitional pension arrangements are to be treated. The White Paper indicates that individuals will have a Foundation Amount calculated on the basis of their National Insurance record prior to implementation. This will be compared to the equivalent single tier amount. Anyone with a Foundation Amount exceeding the full single tier level will have the excess treated as a Protected Payment.

27. This Protected Payment is to be revalued between implementation and retirement in line with a prices index (Clause 6(5) of Schedule 1).

28. Prices based revaluation represents a significant detriment to members with substantial SERPS or State Second Pension built up with the assumption that these benefits would be revalued in line with earnings increases (assuming the long term position of earnings increases exceeding price increases is resumed). GMB can see no reason why the Protected Payments should not be subject to the same level of increases as the single tier level over the period between implementation and retirement.

29. Clause 6 of Schedule 1 introduces this provision and the unfairness outlined above could be eradicated by:

- [line 25, page 28] in sub-paragraph (2), insert the words "more than," immediately before the word "equal"

- [line 28, page 28] delete sub-paragraph (3)

- [line 36, page 28] in sub-paragraph (4), delete the words "and 3(a)"

- [line 42, page 28] delete sub-paragraph (5)

PRIVATE PENSIONS

30. Clause 34 introduces the potential for the Automatic Enrolment duties to be further weakened. The consensus position previously reached on implementing Automatic Enrolment into workplace pensions has been diluted, both prior to, and since this policy has come into force. The impact has been a decrease in the number of people saving and the amounts that are being saved. As we would not wish to see the beneficial impact for individuals being eroded further GMB would not support this Clause.

31. Clause 29 and Schedule 16 outline the requirements to allow for automatic transfers of pension benefits. Whilst GMB can see merit in this policy in respect of benefits which are defined contribution in nature (subject to receiving schemes meeting stringent quality requirements); we would not wish to see this policy apply in respect of salary related or hybrid pensions, in which members would automatically lose guaranteed rights on transfer. The wording of Schedule 16 might inadvertently allow for this through the inclusion of sub-paragraph 5(b) in Part 1 (Page 85, Line 26). This possibility could be removed by extending this sub-paragraph to read "a pension scheme of a prescribed description, but not including salary related or hybrid schemes".

July 2013