Pensions Bill

Written evidence from Prospect (PB 71)

Introduction

1. Prospect is an independent trade union representing over 120,000 professional, managerial, technical and scientific staff across the private and public sectors. Our members work in a range of jobs in a variety of different areas including in agriculture, defence, energy, environment, telecommunications, heritage and scientific research.

2. The Pensions Bill contains provisions which will have a significant impact on the vast majority of Prospect members regardless of the role they carry out or the sector they work in. We welcome the opportunity to contribute written evidence to the committee and we would be happy to discuss any of the points raised in more detail. The views in this submission reflect Prospect policy as well as the comments and views of elected officials and members received since the White Paper was published.

3. The key points and issues for clarification raised are summarised in the section below. Detailed comments are provided in later sections.

Summary of key points and issues for clarification

4. The Government is right to seek to improve the state pension system. Despite significant reforms introduced over the past number of years the current system still leaves too many pensioners in poverty and acts as a disincentive to save for millions of workers. A better designed system is possible.

5. However Prospect is not convinced that the Government has made the case for its proposed single-tier reforms. The committee should investigate the justification for the option chosen in the White Paper and subsequent Bill in great detail. The rationale for such a significant reform should be exposed to much greater scrutiny than has been the case to date.

6. The measures in the Bill, while producing a fairly complex pattern of winners and losers, will reduce overall expenditure on state pensions. Many of the proposals appear to derive from the desire to ensure that the state pension system is sustainable in the long-run. However there does not appear to be any satisfactory definition of sustainability in the Bill or any of the associated documents. The committee should take some time to consider what level of spending on state pension is sustainable as this will inform many issues that arise in relation to the Bill.

7. The issue of the level of the single-tier pension is obviously very important. While the Bill leaves this for regulations, the Committee should consider whether the proposed rate is appropriate and whether there should be any amendments to Clause 3 of the Bill to provide for a higher rate or for a higher underpin to the rate.

8. The statutory override powers provided for under Clause 24 of the Bill are unjustified and will lead to unfair outcomes. The committee should support an amendment to remove the statutory override from the Bill. Should the statutory override remain it will be necessary to enshrine protections for those members given specific commitments that pension benefits could not be reduced without their consent at the time of privatisation of formerly nationalised industries. 24 (3) should be amended to list those protections that cannot be overridden rather than to provide a power to regulate for these protections at a future date. The committee should seek assurances that public services will not be cut back due to the requirement for public sector employers to find funds to pay higher National Insurance contributions.

9. Prospect is disappointed that the Bill contains no measures to alleviate current pensioner poverty. This issue should be a priority and the committee should consider whether aspects of the reforms could improve the position of today’s poorest pensioners.

10. There is a concern that the increased generosity of the reformed state pension arrangements for the self-employed will result in higher National Insurance contributions for this group. The committee should explicitly consider pension outcomes for this group and the case for reforming self-employed National Insurance contributions in the context of the overall reforms.

11. The group most disadvantaged by the proposals for a single-tier pension are those who would otherwise qualify for more state pension through a combination of the existing state pension benefits: the Basic State Pension and the State Second Pension. The notional losses involved are extremely significant – today total state pension entitlement for this group can be up to £270 per week, as changes to the State Second Pension mature the level of entitlement will fall but could still potentially reach close to £200 for many people. While the present system is significantly earnings related and hence the reform will initially be quite redistributive it should be remembered that it is intended that the present system would have become flat-rate in the future (immediately under the alternative proposal presented in the Green Paper). Hence, in the long run, there is no element of redistribution from higher earners to lower earners in the proposals. There will be redistribution from people with long contribution / credits records to people with shorter working / caring lives and, significantly, from people with poor occupational pension provision (ie those in defined contribution or no pension scheme) to those with good quality defined benefit pension schemes. It seems perverse for the Government to advance reforms that reduce state pension entitlement for those with the greatest need for it while boosting state pension entitlement for those with better occupational pension provision to rely on. The Government has not given a convincing justification for the pursuing a policy with redistributive effects as described; Parliament must press Ministers on these impacts of the measures in the Bill. The transitional protections for people with a foundation amount that is higher than the level of the single-tier pension are not acceptable; paragraph 4 of Schedule 2 should be amended to allow for the protected amount to be revalued in line with earnings until State Pension Age.

12. The revised approach to transitional arrangements for workers with periods of contracted-out service outlined in the White Paper is better than the approach envisaged in the Green Paper.

13. The Work and Pensions Select Committee’s recommendation that people within 10 years of State Pension Age should retain entitlement to a pension based on a spouse’s contribution record should be accepted.

14. The approximately 700,000 women born between April 1951 and April 1953 should be allowed to choose to be treated under all the rules for state pensions as either men or women born on their date of birth.

15. Prospect is opposed to bringing forward the increase in State Pension Age to 67 by 8 years. This measure unfairly penalises those groups who have lower life expectancy. The committee should consider options such as retaining a lower qualifying age for Pension Credit or a full state pension payable after an appropriate number of qualifying years.

16. Prospect would like to see amendments to Clause 26 that (1) specified some of the factors (besides longevity) that the Secretary of State must consider in reviewing State Pension Age and (2) provided for a minimum number of years from State Pension Age within which State Pension Age cannot be further increased.

Background

17. Much of the overall pension system in the UK today is based on the recommendations of the independent Pensions Commission. The Commission investigated the principle of a single-tier state pension in great detail and concluded that a two-tier approach was preferable [1] . While some of the circumstances have changed and, in particular, the approach to transition outlined in the White Paper deals with some of the issues raised by the Pensions Commission we believe it is important for the committee to explicitly consider the overall case for a single-tier state pension.

18. It is particularly important to rigorously assess the overall case for a single-tier state pension in the light of the lack of detailed rationale for this in either the White Paper [2] or associated documents such as the Pensions Bill impact assessment [3] .

19. The single-tier impact assessment states that concern around the sustainability of the pension system is a key reason for moving away from the current system. Comments from the Pensions Minister and others in the debate on second reading of the Bill reinforced this sentiment. However this argument is disingenuous. In the same debate the Pensions Minister and others lauded the triple lock policy. However the OBR’s fiscal sustainability report [4] shows that the triple lock adds more to the long-term cost of state pensions (0.6% of GDP in 2061-62) than the change to a single-tier state pension would save in the same year. When the triple lock was first announced to Parliament no Minister or other spokesperson stated that they were acting irresponsibly and making the state pension system unsustainable. Yet now that same level of projected spending on state pensions is said to be unsustainable and requiring the radical reform of a move to a single-tier system. The Government would appear to be using entirely conflicting rationales to suit its purposes at different times and this hugely undermines its case for the single-tier state pension.

20. The single-tier system is also claimed to reduce complexity and to provide a clear foundation for private saving. However the numbers actually lifted out of the means-tested benefits net are very limited and it will remain difficult for lower earners especially to calculate their effective marginal deduction rate with any degree of certainty.

21. The case for rejecting the option for faster flat rating of additional State Pension can be found in Annex 2 of the White Paper and Annex C of the January version of the impact assessment of the Bill. As noted above these analyses came to the opposite conclusion to that of the Pensions Commission.

22. The reasons given for rejecting this option include the argument that it would not support people to take greater responsibility for saving for their retirement. In fact a service-related benefit such as a flat-rate State Second Pension would surely encourage people to work longer and hence enable them to save more for their retirement.

23. Another argument is that this option would not provide clarity or certainty to people. However a system that provided a known, flat-rate benefit for every extra year of contribution or credits would be very clear and would provide as much certainty as any other service-related benefit.

24. The most significant point against the option for faster flat-rating of the State Second Pension cited in the impact assessment is that it would retain much greater variation in outcomes. However this has to be put into some context. Some of the variation in outcomes is because of the differences in the contribution system. The self-employed are exempted from paying contributions towards the State Second Pension and as a result have lower outcomes. More significantly variation in outcomes between those who are contracted out of and contracted in to the State Second Pension is surely to be welcomed. Members of contracted out schemes are building up generous occupational pension benefits and have less need for higher state pension benefits. Members of defined contribution pension schemes or workers who are in no pension schemes clearly need higher state pension benefits. Seeking to eliminate this source of variation is surely counterproductive.

25. It is difficult to avoid the conclusion that one of the main reasons that the outcome of the analyses of these options has changed since the Pensions Commission looked at it is because the Treasury has been impressed with the significant short-term and long-term savings that would accrue.

Impact of single-tier pension on the Exchequer

26. The Government’s initial guiding principle was that any reforms must be cost neutral in each and every year. While this form of words obviously implied cost savings over the long-term (except in the extremely unlikely circumstance that reforms could be exactly cost neutral in every year) the scale of the cost savings that have emerged are more significant than most commentators would have expected.

27. The committee may want to probe the nature of the discussions between DWP and HMT in the extended hiatus between the publication of the Green Paper and the much delayed White Paper.

28. A key issue that does not appear to have been analysed or debated in any depth is what represents a sustainable level of expenditure on state pensions in the long-term. Key policy decisions are being made on the basis of needing to ensure that state pension spending is sustainable in the long-run but with no clear indication of what this might actually mean. The Government should explain what its view of sustainability is in relation to state pension spending and the committee should test this.

29. The key short-term exchequer impact is the initial savings on contracted-out rebates arising from the abolition of the State Second Pension. This is covered in more detail in the section on contracting-out below.

30. The long-term benefit savings are outlined in Annex C of the May version of the impact assessment. Initially the main savings are on means-tested benefits and savings from these benefits even cancel out relatively small increases in expenditure on state pension in the medium term. As savings on means-tested benefits fall (as the baseline cost of these benefits was falling anyway so the potential for savings reduces) the long-term savings from the new state pension regime kick in.

31. The overall impact on the exchequer hides a complex pattern of winners and losers and these are analysed in more detail in a later section.

Level of single-tier pension

32. Clause 3 of the Bill provides for the full rate of the single-tier pension to be set in regulations. Schedule 12 (14) provides for the full-rate to be increased in line with the general level of earnings.

33. Clearly the full-rate of the single-tier pension will directly impact projected expenditure on state pensions. Hence any debate on the level of this benefit must take into account what level of spending on state pensions is thought to be sustainable.

34. However there must also be an analysis of whether the level of single-tier pension is sufficient, along with other benefits and forms of saving, to enable people to enjoy a comfortable standard of living in retirement.

35. The level of the single-tier pension underpinning the projections undertaken for the impact assessment (£144 per week in 2012/13 earnings terms) is not sufficient in itself to keep people out of poverty in retirement. It should also be noted that even someone with as many as 34 years contributions or credits will earn a pension of less than the guarantee part of the Pension Credit at this rate. As a consequence the committee must consider whether there is a case for the single-tier pension to be set at a higher rate and whether any amendments to Clause 3 that provided for a higher rate would be appropriate.

36. Annex B of the May version of the impact assessment acts on the Work and Pensions Select Committee recommendation that the DWP provide further information about the expenditure implications of changing the starting rate for the single-tier pension [1] . This analysis indicates that even a rate of £145 per week in 2012/13 earnings terms might compromise the aim of cost neutrality in every year of the projections. However this ignores the savings that accrue due to the abolition of contracted-out rebates. The requirement to be cost neutral in each and every year is far too restrictive in any case. The short and long term savings are more than enough to cover a few years in the 2020s and 2030s when costs may be slightly higher. In any case the entire process would be built on incredibly weak foundations if a proposed change in the rate of just £1 per week would fatally undermine the reforms.

37. The projections underpinning the impact assessment of the proposals in the Bill assume that the triple lock applies for uprating the single-tier pension. The Bill provides for earnings uprating only. Unless and until a long-term sustainable level of spending on state pension is explicitly debated by Parliament and decided upon there can be little confidence in the level of uprating that will apply in practice. If the level of expenditure forecast in impact assessment is considered to be unsustainable then there is little doubt that the triple lock will be abandoned by a future Government. It would be more open and honest (and useful to people planning for retirement) for these issues to be fully discussed as the Bill progresses through Parliament.

Abolition of contracting out

38. The introduction of the single-tier state pension means the State Second Pension would close and, by implication, the option to contract out of it would end. Clause 24 of the Bill provides for the ending of contracting out. Schedules 13 and 14 provide for a statutory override and for contracted-out rights to be protected.

39. The Government has taken the view (supported by some submissions on the Bill to date) that the abolition of contracting out will have no impact on the level of defined benefit pension provision in the private sector because employers will be able to make changes that recoup the higher National Insurance costs. Prospect cannot agree. The abolition of contracting out will result in every private sector defined benefit scheme being reviewed. An inevitable result will be the closure of some schemes, even if this is only bringing forward closures that would have otherwise happened in due course anyway.

40. Prospect opposes the general statutory override provided for in Clause 24. Changes to pension schemes’ trust deeds and rules should be made in compliance with the provisions of those deeds and rules. There is ample evidence that the normal processes of consultation and negotiation with members’ representatives and trustees has shown all the flexibility required to manage any increases in costs that will arise from the abolition of contracting out. There is no justification for the Government to interfere in the process in this manner. While Prospect hopes that the vast majority of schemes will enact any changes that are deemed necessary through the normal processes described here, the existence of the statutory override significantly reduces the incentive for employers to engage meaningfully in such discussions. The consequence of this could be increased industrial relations problems and outcomes that are unfair to members.

41. 24 (3) provides for exceptions to the statutory override. 24 (3) (b) in particular allows for regulations to specify schemes to be exempted. Presumably this is to allow for schemes in formerly nationalised industries with members covered by various protected persons regulations to be exempted. These schemes were the subject of a separate consultation which the Government has not responded to at the time of writing. It is important that this issue is specifically debated in committee and at later stages as otherwise the Government’s consultation response could be released after scrutiny of the Bill has been completed without any proper airing of these issues. Prospect responded to the consultation [1] and has very strong views that these schemes should be exempted from any statutory override should Parliament retain one. Failing to exempt these schemes from a general statutory override provision would contradict assurances given to these members at privatisation. The DWP’s own figures show that significant numbers of protected persons would be worse off as a result of having an override applied to them. Past assurances that were provided in order to ensure that the process of privatisation in formerly nationalised industries ran smoothly and successfully cannot be invalidated retrospectively by this proposed legislation currently being considered by the committee. It is unclear to Prospect that listing pension schemes in regulations as proposed is a practical way of exempting members covered by these regulations from any statutory override. This is because members covered by protected persons regulations have carried those protections into a large number of different pension schemes and tracking all of these would be difficult. Instead Prospect believes 24(3) should be replaced by a provision specifically listing those protections that are not overridden by Clause 24.

42. 24 (3) also provides for public service pension schemes to be exempt from any statutory override in line with previous commitments given during negotiations on public service pension reform. However the commitment to protect public service pension benefits will be completely hollow if higher employer national insurance costs are simply passed on to scheme members in the form of lower pay instead. Public services must be reimbursed for the higher national insurance costs they incur. The Budget 2013 policy costings document [2] states that the yield from abolishing contracting out is £5.4 billion in cash terms in 2017-18. However about £3.3 billion is raised from public services through higher National Insurance costs for public service employers. This leaves a net yield of about £2.1 billion in real new money. The Budget 2013 also stated that the yield from the abolition of contracting out would pay for an employment allowance of £2,000 for employer National Insurance contributions. The yield will also pay for the Government’s proposed cap on social care costs (together with a freeze in the inheritance tax threshold). The policy costings document indicates that the cost of the former measure will be £1.7bn in 2017-18. The press release [3] announcing the cap in social care costs indicates that this will cost £1 billion by the end of the next parliament. The yield from freezing the inheritance tax threshold in 2017-18 is £0.2 billion. Hence the actual new money yielded by the abolition of contracting out has already been over committed by the Government to policies that cost more than the anticipated yield. The implication is that public services will suffer further cuts as a result of these changes. The committee should seek commitments from Ministers that public services will be reimbursed for higher costs incurred as a result of the policy so that the Bill is not an instrument for achieving further public service cuts through the back door.

impact of single-tier pension on individuals

43. It is impossible to fully capture the impact of the proposals in the Bill on every group, but it is important that the likely gainers and losers are clearly described and understood by Parliament when it deliberates on the reforms. The following sections give a brief outline of the impact on different groups and Prospect’s views on steps that should be taken to mitigate certain issues.

- Current pensioners

44. One in seven pensioners live in poverty in the UK according to the latest available statistics [1] . 9% of pensioners are classified as being materially deprived. We know that older pensioners are more likely to be on lower incomes. It is extremely disappointing that the Bill contains no measures to tackle issues of poverty amongst current pensioners. While there may be practical or other difficulties in extending the proposals for reform to everyone there is also a real concern that what will become the legacy state pension system for current pensioners will be overlooked in the future. Tackling pensioner poverty should remain a top priority for any Government and this can only happen by considering improvements for people already over State Pension Age, particularly for our oldest pensioners.

- Self-employed

45. While the Bill includes proposals that have a significant impact on the state pension entitlement of the self-employed there is very little data provided to support the rationale for these changes. It is surely difficult for Parliament to deliberate on this aspect of the reforms without information on the current position of people who spend time in self-employment and their pension outcomes. Even the specific note [1] provided by the DWP on this topic fails to cover this point.

46. Those with significant periods of self-employment are likely to be significant winners from the proposed reforms as they currently only accrue entitlement to the Basic State Pension and not State Second Pension. Prospect has many self-employed people in membership. To the extent that low earning self-employed people may secure better outcomes and be encouraged to save more towards retirement the proposed reforms are welcome.

47. However the Bill is silent about the potential impact of the reforms on the National Insurance contributions payable by the self-employed. In debate and in committee much has been made about the fact that low earning self-employed people pay higher National Insurance contributions than employees on the same level of earnings. However, overall, the National Insurance system is already more generous to the self-employed than employees even before the improvements under the Bill are considered. Previously an estimate of the "subsidy" to the self-employed under the National Insurance system was published in the documentation accompanying the Budget. While this practice appears to have been discontinued the latest available estimate, at £1.95 billion [2] , indicated that the "subsidy" is substantial. In these circumstances it will be difficult to resist pressure to increase National Insurance contributions for the self-employed. Any change in contributions arising from improved state pension entitlement for the self-employed under this Bill should be debated by Parliament as the Bill progresses.

48. Basing entitlement to the single-tier pension entirely on Class 2 National Insurance contributions would seem to open the system up to potential abuse on a number of fronts. Any reform of the contribution structure for the self-employed should consider the risks inherent in retaining the link to Class 2 National Insurance contributions.

- Workers with poor occupational pension provision

49. In this section workers with poor occupational pension provision are taken to be employees who are members of defined contribution pension schemes or of no pension scheme and are therefore contracted-in to the State Second Pension. While it is of course a generalisation to say that all such workers have poor pension provision it is a simplification that enables us to make some relevant points that the committee should consider.

50. This group is one of the most significant losers from the reforms in the Bill. Currently workers in this group can accrue a maximum of £273.15 per week in state pension benefits (£110.15 per week Basic State Pension and a maximum of £163 per week State Second Pension). This amount is partly a legacy of old rules for additional pension which are more generous overall and particularly to higher earners. Eventually the State Second Pension will be reformed to be less generous and flat-rate. If the Government had opted for moving to a flat-rate State Second Pension immediately workers in this group who started in the system after April 2016 and had very long qualifying service or credits could still accrue nearly £200 per week in total state pension. Clearly a reform that would limit state pension entitlement to £144 per week will be very detrimental to long servers who do not have access to the best occupational pension schemes.

51. The Government states that this group has been protected by the transitional arrangements proposed in the Bill. Prospect cannot agree with this assertion.

52. The proposals for protections for this category amount to a calculation of a foundation amount representing entitlement under the current system at the start of the new regime. Any excess of the foundation amount over the rate of the single-tier pension will be deemed to be a protected payment. However, instead of revaluing this protected amount in line with average earnings until State Pension Age, a conscious decision has been taken to limit the revaluation to inflation only. This approach, in contrast to the improvement in the transitional arrangements for members of contracted-out schemes between the Green Paper and White Paper simply adds insult to the injury of the overall proposals for this group of workers. At a minimum paragraph (4) of Schedule 2 should be amended to allow for earnings revaluation of the protected payment.

53. This group is also disadvantaged through being unable to accrue further state pension from National Insurance contributions made under the new system. Instead their contributions will help to pay for higher state pension benefits for workers who have been mainly contracted out over their careers. However, almost by definition, this group will enjoy much better occupational pension provision so it would seem perverse to boost their state pension entitlement at the expense of those with poorer occupational pension provision or none at all.

54. Workers in this group are also disadvantaged if they have shorter service. This is because of to the increase in the minimum number of qualifying years required to accrue a full state pension. Contracted-in workers with 30 qualifying years would accrue an appreciably higher state pension from the Basic State Pension and State Second Pension than is offered by the single-tier regime.

- Workers with good occupational pension provision

55. In this section workers with good occupational pension provision are taken to be employees who are members of defined benefit pension schemes that are contracted-out of the State Second Pension.

56. Prospect welcomes the change to transitional arrangements for the single-tier pension for this group between the approach outlined in the Green Paper and that outlined in the White Paper. However the improvement in transitional arrangements for this group stands in stark contrast to the lack of proposals to improve the position of other groups such as existing pensioners or workers who have been contracted-in to the State Second Pension.

- Pension based on spouse’s record

57. A small group of people who will lose out significantly as a result of the reforms are those who would have been entitled to a pension of 60% of the rate of the Basic State Pension based on the contribution record of their spouse. It is unfair to make such significant changes to state pension entitlement for this group with such little warning. In the debate on second reading of the Bill the Pensions Minister stated that there has to be "a balance between moving to a new system and protecting people as we move, and not setting in aspic every single corner of the old system". We agree that there is a balance here but that failing to give protection to this group when it is given to others cannot be justified. We agree with the recommendation of the Work and Pensions Select Committee to grant people within 10 years of State Pension Age the right to continue to receive this benefit.

58. It should also be noted that the single-tier pension will not be inheritable in the same way that the State Second Pension is. This means that surviving spouses who lose out as a result of the overall changes will be further disadvantaged on the death of their spouse.

- Women born between April 1951 and April 1953

59. There has been much debate about the case of the approximately 700,000 women who were born between April 1951 and April 1953. Prospect agrees with the Work and Pensions Committee that the issues involved here are more complex than they may at first seem. The fairest outcome would seem to be to allow these women to choose to be treated under the all rules as they apply to either men or women born on their date of birth.

Pensionable Age

60. Part 2 of the Bill includes provisions to bring forward the increase in State Pension Age to 67 and to have periodic reviews to consider future increases in State Pension Age.

61. Clause 25 provides for the increase in State Pension Age to 67 to be brought forward. Around 8 million people born between April 1960 and April 1969 will be affected. The policy is projected to save £81.6 billion net between 2026/27 and 2035/36.

62. The impact assessment for this aspect of the Bill’s reforms [1] mainly considers the effect in aggregate only, though it does supply some data for very high level groups (ie the countries of Great Britain and broad socio-economic categories). The conclusions that can be drawn from the impact assessment are necessarily limited as a result. A measure of this importance should be supported by a more detailed analysis of the potentially differential impact on different groups. If insurance companies and pension funds can analyse longevity data by postcode Government should be able to do better than provide Parliament with an analysis by country.

63. Prospect is opposed to the bringing forward of an across the board increase in State Pension Age of the kind allowed for in the Bill.

64. If an across the board increase is to be implemented there should be appropriate mitigating measures for those most impacted by the change. Keeping the qualifying age for Pension Credit at 65 or allowing people with an appropriate number of qualifying years to draw pension earlier are two options that the committee should consider.

65. Clause 26 makes provision for a periodic review of State Pension Age. Prospect supports the approach of a wide ranging review of a number of relevant factors in setting State Pension Age rather than the more formulaic alternative discussed in the Green Paper.

66. However Clause 26 contains little detail on the specifics of the reviews and no safeguards against potentially dramatic increases in State Pension Age. Prospect would like to see more detail on the types of other factors (besides longevity) that the Secretary of State must consider in these reviews. Prospect would also like a minimum number of years from State Pension Age within which further increases cannot be imposed inserted into Clause 26.

Private Pensions

67. Clause 29 introduces Schedule 16 which provides for a system of automatic transfers of accrued workplace pension rights to another scheme that of which that person is a member. The proposed system will be of the "pot follows member" type. For reasons given in previous consultations Prospect would prefer for the Government to adopt the "aggregator" rather than the "pot follows member" approach.

68. Prospect welcomes the powers under Clause 30 to make regulations to prohibit financial or similar incentives to participate in enhanced transfer value exercises.

69. Prospect also welcomes the provisions to abolish short service refunds for money purchase schemes under Clause 32.

70. For the reasons set out in our consultation response [1] on the issue Prospect opposes the new objective for The Pensions Regulator provided for under Clause 42.

July 2013