Monday, January 14, 2013

UK's Radical Shake-Up of State Pensions?

Oliver Wright of the Independent reports, Radical shake-up of state pensions is 'fair', Prime Minister insists:
David Cameron today defended the Government's plan to introduce a single "flat-rate" state pension which could result in some workers facing higher National Insurance contributions to pay for it.

Mr Cameron said plans for a unified pension rate - equivalent to around £144 in today's money, and due to be introduced for new pensioners from 2017 was "fair".

"This will help a lot of women and a lot of lower paid workers who otherwise wouldn't get a decent state pension," said Mr Cameron.

Ministers said the reform will create a simple flat-rate pension set above the means test (currently £142.70) and based on 35 years of National Insurance contributions, and will "hugely benefit" women, low earners and the self-employed, who under existing rules find it almost impossible to earn a full state pension.

However around six million workers will face higher National Insurance payments in future as the practice of "contracting out" the state second pension to employers is ended.

Those affected are expected to include more than a million private sector staff enrolled in final salary schemes, and an estimated five million public sector workers.

The GMB union said there could be "very serious consequences" which could affect an agreement on public sector pensions, while the National Pensioners Convention (NPC) described today's White Paper as little more than a "con trick" for future generations, by offering them less than they get now, asking them to pay more and work longer before they can get it back.

But ministers will argue that, by replacing today's complex system of add-ons and means-testing, the single tier will provide certainty to people about what they will get from the state and provide a better platform for them to save for their retirement.

Work and Pensions Secretary Iain Duncan Smith said: "This reform is good news for women who for too long have been effectively punished by the current system.

"The single tier will mean that more women can get a full state pension in their own right, and stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family."

Pensions Minister Steve Webb said: "The current state pension system is too complicated and leaves millions of people needing means-tested top-ups. We can do better.

"Our simple, single tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save."

Brian Strutton, national officer of the GMB union, said a new flat-rate pension should be fairer than the present arrangements, but warned of a "very serious consequence" of the Coalition's plans.

"That is the increase in National Insurance contributions that employers and employees in defined benefit pension schemes will have to pay," he said.

"For employers that is 3.4% of the NI ranking earnings and for the six million employees affected it will be an extra 1.4%. Most DB scheme employers and members will find this unaffordable so will need to renegotiate their schemes.

"A good example is the Local Government Pension Scheme which has just been reformed by unions and government and would face an unaffordable extra NI bill of several hundred million pounds.

"Just as the Treasury legislation to reform public sector pensions is going through Parliament, the Department for Work and Pensions (DWP) is proposing to blow it all out of the water by completely rewriting the state and occupational pension landscape."

Mr Strutton said the Treasury and DWP needed to "get their act together" to avoid reopening the public service pension deals, adding: "Abolition of the contracting out NI rebate will impose a £6 billion new tax burden on workers and companies which may be a nice windfall for the Chancellor but is not fair to those who will have to pay more tax."

Unions have been embroiled in a bitter dispute with the Government over its controversial public sector pension reforms, which led to a series of strikes.

An agreement was struck in local government, but unions in other areas have refused to sign up to new arrangements.

NPC general secretary Dot Gibson said: "The White Paper offers nothing to existing pensioners and leaves many of them to struggle on lower pensions and a complicated means-testing system.

"The worst affected will be around five million older women who don't have a pension anywhere near £144 a week and would clearly benefit if they were included in the new arrangements, but look like they are going to miss out.

"This will only add insult to injury to millions who have already made a contribution to our society but are still living in poverty.

"The outlook for future generations of pensioners is even worse. They are being asked to pay an extra five years worth of National Insurance contributions, work longer before they can retire and end up with less than they can get today. At the moment you only need to contribute for 30 years in order to get a full state pension, and if you do, you can get £150 a week when you retire at 65.

"What the Government is trying to sell is a plan for people to pay in for 35 years, get £144 a week and have to wait at least until 68 before they can collect it. No-one should be taken in by what is little more than a con trick."

Shadow pensions minister Gregg McClymont said the Coalition had originally suggested the reforms would be introduced in 2016.

"The chaos surrounding the Government's relaunch gets worse and worse. These pensions proposals are just half a plan yet they are still delayed by a year," he said.

"With the granny tax, this Government has already established a track record of incompetence and secrecy so we will look at the detail, but the Government should come clean immediately and set out exactly who the losers are."

Joanne Segars, chief executive of the National Association of Pension Funds, said: "The end of contracting out will become a key issue in both the private and public sectors as the Government moves towards a much-needed overhaul of our state pension.

"The transition will have to be handled very carefully to ensure a fair result for employers and savers."
Similarly, Peter Dominiczak of the Daily Telegraph reports, State pension will leave 'majority worse off', experts warn:
Paul Johnson, the director at the Institute for Fiscal Studies (IFS), said that in the long-term “most people will end up with a lower pension than they might otherwise have thought”.

Mr Johnson’s comments came as David Cameron said the state pension will make the system “much simpler” but will lead to people retiring later.

From 2017, the basic state pension will be set at about £160 a week and the complicated system of means-tested “top-ups” will be scrapped.

Employees will have to spend five more years working to qualify for the full state pension, and younger people face the prospect of working into their seventies.

To help fund the extra costs of the scheme, millions of workers with final-salary schemes, particularly in the public sector, will also have to pay more tax and the second state pension will be phased out in future.

Under new plans to be unveiled by ministers today more than 750,000 women in their fifties will also receive an extra £468 annually when they retire.

The current full state pension is £107.45 a week, but can be topped up to £142.70 with pension credit, and by the state second pension.

Mr Johnson said the “clear beneficiaries” of the pension reforms would be the self-employed, but he warned that “most people” will be faced with lower pensions.

“At the moment there is a basic state pension of £107 a week,” Mr Johnson told BBC Radio 4’s Today.

“It, plus the state second pension, which is the earnings-related bit which you earn on top - the two of those will eventually be abolished and they’ll be replaced by this thing at £144 a week in current terms.

“Now the point is that for most people, the total value that they are currently earning, of their basic pension plus their state second pension, if you add those together in the future will be more than £144 a week. So, while in the short-run there’ll be a bunch of winners from this, in the longer run, most people will end up with a lower pension than they might otherwise have thought.”

Mr Johnson added that the “self-employed will be the one group who are unequivocally better off in the long run because at the moment they’re not earning any state second pension”.

The Prime Minister said that if people want to have a “decent state pension” then British workers will have to “work a bit longer”.

Speaking to ITV’s Daybreak the Prime Minister said the new reforms “will help a lot of women” and “low-paid people”.

“[The new system will be] much simpler,” Mr Cameron said. “A single state pension cuts out a lot of the means-testing and also will help a lot of women, a lot of low-paid people who otherwise wouldn’t get a good state pension.

“So a good idea, but it’s long-term. This is for new pensioners, I don’t want to mislead anyone.”

The Prime Minister confirmed that the retirement age would rise under the plans.

He said that it is “reasonable” to expect that people spend a third of their adult lives working.

“We are going to have later retirement ages because we’re living longer,” Mr Cameron said.

“And I think if you want to go on having a decent basic state pension, which we do, you have to either put up taxes or ask people to work a bit longer.

“And I think it’s fair to ask people to work a bit longer because we’re living longer. So the idea that you should spend about a third of your adult life in retirement seems to me a reasonable one.”

In an article for today’s Daily Telegraph, Steve Webb, the pensions minister, says that the “complicated and divisive” pension system must be reformed to “reflect modern working patterns and modern patterns of family life”.

Mr Webb said the reforms will “particularly benefit many older women, whose time at home with children has damaged their state pension entitlements”.

In today’s article, Mr Webb says: “Beveridge’s original idea was for a single, simple, decent state pension, paid after a lifetime of National Insurance contributions. We have moved an awfully long way from that vision.” He adds: “Thanks to a complicated and divisive system introduced by the last government, millions of pensioners require top-up amounts to get their pension up to a decent minimum. However, this means that those with small amounts of additional savings often find themselves only slightly better off than someone who never bothered to save.”
Finally, Sarah Neville and Norma Cohen of the FT report, People must work longer for state pension:
People will have to work longer to qualify for a full basic state pension under long-awaited plans for a flat-rate retirement benefit.

David Cameron, prime minister, said on Monday that the changes were a “major advance” and a “simplification” of the system, which would be fairer for women and the low paid.

He criticised the current system – where the basic pension is lower but combined with tax credits – as “too complex” and too dependent on means testing.

Steve Webb, the pensions minister, will say on Monday that people will have to work for 35 years, up from 30, to be eligible for the full pension, set at about £144 in today’s money. To limit the cost of the changes, due to be in place by 2017, the government is expected to say that people will have to be in employment for a minimum period of up to 10 years to qualify for any single-tier pension payment. Since 2010, no such minimum has existed.

Iain Duncan Smith, the work and pensions secretary, said the reform would particularly benefit women who had been “effectively punished” by the current system. More would qualify for a state pension in their own right, even if they had taken time out to care for a family.

However, ministers are worried that the announcement risks being overshadowed by a row over the number of potential losers.

People who have “contracted out” of the state second pension by joining an occupational pension scheme face losing their national insurance rebate, which could amount to a tax rise of 1.4 per cent of pay.

However, in an important concession disclosed in the Financial Times on Saturday, the government is expected to allow that group to build up annual credits to offset the loss of the rebate and boost their entitlement.
An austerity-bound Treasury can still expect a windfall from the abolition of the rebate, since the bill for the credits will fall due only once those individuals reach state pension age, perhaps in as much as 20 years’ time.

The white paper will also, for the first time, outline a mechanism through which the state pension age will rise in line with increasing life expectancy. It is expected to recommend that the age should be reviewed at least once during the life of each parliament and a minimum of 10 years’ notice be given for any change.

Michelle Mitchell, director-general of Age UK, the charity, said the proposals would make the system fairer, simpler and easier for people to plan for retirement.
Pension reform is sweeping the UK and while experts chime in on the latest reforms, the reality is that Brits will be asked to work longer, contribute more and most will receive less in retirement. And the truth is these reforms won't make a difference for those already facing looming pension poverty. For these individuals, the message is loud and clear, let them eat cat food.

What the UK really needs is major pension reform, introducing a national plan similar to the Canada Pension Plan Investment Board.  Last week, I discussed CPPIB's explosive growth, explaining why Canadians are lucky to have this organization and other large public pension plans managing their pension contributions at arms-length from the government.

What you have in the UK right now is a complicated system of pensions where some have defined-benefit (DB) pensions but most don't. And most public and private DB plans in Britain are mature, de-risking, paying out more in benefits than they're receiving in contributions. And most are in chronic deficits.

It's a royal mess, which is why I take all these news articles touting a "radical  shake-up of state pensions" with a grain of salt. The UK needs to consolidate pensions and introduce real reforms by creating a national pension system closer to that of Canada, Denmark, the Netherlands and Sweden (I'm less impressed with Ireland where government interference is rampant).

Below, Steve Webb, the UK pensions minister, tells the Daily Telegraph the “complicated and divisive” pension system must be reformed to “reflect modern working patterns and modern patterns of family life”. Notice the 'spin' he and the Prime Minister are putting on these reforms.