Study backs pensions reform plans

Ministers’ plans to reform state pensions would cost no more than the current system and would release millions from dependence on means-tested benefits, a study shows.

The research, conducted for the National Association of Pension Funds by the non-partisan Pensions Policy Institute, assessed the coalition’s proposals for a single-tier state pension paying basic benefits much higher than those now available.

It concluded that cutting the number of state pension schemes and rolling these into a single, more generous benefit worth £140 a week in today’s money would have little effect on the nation’s finances.

The NAPF and others have attacked the current system, which consists of a patchwork of benefit structures for different categories of those who have reached state pension age, saying it is overly complex and ungenerous.

“The UK has one of the meanest, most convoluted state pensions in Europe and a radical overhaul is long overdue,” said Joanne Segars, NAPF chief executive.

“A simpler, more generous state pension is a win-win that could lift millions out of poverty without hitting the taxpayer’s pocket. Those who are disadvantaged by the current system, like women and the self-employed, will be better off.”

However, changing the basic state pension would create losers, particularly among private sector employers who benefit from so-called contracted-out rebates of National Insurance contributions from workers contributing to their company pensions.

Data from Revenue & Customs show that in the years between 2001-02 and 2009-10, employers received a total of £60.4bn in contracted-out rebates. The scheme would also require employees in defined benefit schemes to pay higher national insurance contributions.

The PPI report looked at two proposals made in a government green paper on pensions reform. The first would accelerate the phasing out of the state second pension (S2P), a programme created in 1978 as an earnings-related benefit for those not offered a scheme by their employer.

The PPI concluded that this proposal would not increase state pension incomes for any workers and by 2034 would lead to 5.3m pensioners seeing modest reductions in basic benefits. The plan would not alter the numbers receiving means-tested benefit.

However, the second option – which is broadly favoured by the NAPF – would increase incomes for 6.8m pensioners, by an average of £23 a week. It would also cut the number of those eligible for means-tested benefit to about 5 per cent of pensioners, from 35 per cent, by 2055.

Ros Altmann, pensions expert and director-general of the financial advisers Saga, noted that rules requiring employers to offer savings plans risked jeopardising low-paid workers’ entitlement to means-tested benefit – making them more likely to opt out of saving for retirement.

“If we do not remove this already known risk to the pensions of the very low and moderate earners at whom auto-enrolment is aimed, we will not have a system fit for the 21st century,” Ms Altmann said.

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