24 January 2014

Neil Duncan-Jordan, National Officer, National Pensioners Convention

Neil Duncan-Jordan explains how under Coalition policies, both occupational pensions and state pensions will fall in value and take longer to accrue for future UK workers.

For years, successive governments have relied on the working population retiring with a good occupational pension in order to keep the state pension low. Not only is this approach now dead in the water, it has also created a situation whereby the UK state pension is amongst the lowest as a percentage of GDP in the developed world. Contrary to claims made by politicians about millionaire pensioners, the reality is somewhat different. One in five older people live below the official poverty line and around 60% of all older people have an income of less than £10,500. Some 4.5m receive something in the region of £10,500 to £25,000, and only 250,000 live on £40,000 or more.

The overwhelming majority of Britain's pensioners are not therefore living in the lap of luxury.

Historically, the state pension system has let down women the most. They are the largest group amongst the poorest pensioners and a lifetime of low pay, part-time work, the virtually worthless married woman's stamp, and a lack of credits for time taken out of the workplace before the late 1970s have all contributed to this situation. Ironic then that despite being the very group that would benefit the most from the new single-tier state pension – they will be excluded from the changes.

Whilst it has been hailed as a radical reform, the proposal to introduce a flat-rate single payment state pension from April 2016 hasn't really arisen from the desire to improve the state system. In fact, the very opposite is true.

Today, someone with 30 years' worth of National Insurance contributions could retire with a combined basic and second state pension of £150 a week. Under the new single-tier pension, they would have to work 35 years in order to get £144. Not only that, but the government has made it clear that not a single extra penny is going into the scheme, and in fact in the long term the state will actually spend less as a percentage of GDP on the single-tier state pension than if the current system were to continue.

The real reason though for introducing the new pension is to make a success of auto-enrolment. There is recognition in government that the widespread reliance on means testing in retirement – if it continued – would constitute a serious disincentive to saving in an auto-enrolment-style pension. The argument goes that hard-pressed workers will only put money into such a scheme if means-tested benefits are largely removed through improved state pensions – otherwise a combined retirement income of state pension and auto-enrolment might still end up being below the level of means-tested support. If that were the case, many workers would rather spend their money now.

The exclusion of existing pensioners from the new pension system will also create problems. The introduction of a cut-off date in April 2016 will effectively create a two-tier system. As a result, some pensioners will be getting simplified state pensions whilst others will be left to claim complicated means-tested benefits. The existing state pension and the new state pension will also be uprated in different ways, so that more of the new pension will rise in line with the better of wages, CPI or 2.5% than the old system. The pensions' gap between pre-April 2016 pensioners and those retiring after will therefore widen over time.

Those with defined benefit (final salary) occupational pensions in the private sector will also have the terms of their scheme unilaterally changed – which could lead to either lower pensions in retirement or higher contributions from salary. This could signal the end of the final salary pension scheme in the private sector altogether. Whilst those in the public sector will not be affected in this way, employers will still be looking to find other means of off-setting the extra 3.4% National Insurance contributions they will have to pay. This could potentially be through wage freezes or job cuts.

But perhaps one of the biggest problems with the single tier pension is that most people born after 1970 can expect to receive less from the state pension than previous generations. They will have to work longer, pay more and end up getting less. We already know that occupational pensions will be less generous for future retirees – and now the state pension will do likewise.

But it doesn't have to be that way. The existing state pension could be strengthened by raising it to the official poverty level (of around £176 a week) and moving towards a Citizen's Pension funded through National Insurance, but based on residency of say at least 30 years, rather than years of contributions. The State Second Pension (S2P) should be retained as a good earnings-related pension for all workers, maintaining the higher replacement rate for the low paid and the basic and second state pensions should be uprated annually in line with average earnings, RPI (Retail Price Index), CPI (Consumer Price Index) or 2.5% (whichever is the greater) so that its value is maintained.

One thing though is clear: even if the new single-tier state pension comes in in April 2016, the campaign to improve the state pension system for all pensioners will continue.

Neil Duncan-Jordan will be speaking in more detail on the threats to workers' retirement income at our Pensions Conferences in London and Liverpool this February. Click here to find out more and book your place