House Magazine article – ‘If I was in charge of pension reform…'

by Dr. Ros Altmann

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The most fundamental problem to be addressed in the UK pension system is the ludicrously low level of the state pension, which has left nearly half of pensioners requiring means-tested benefits to avoid poverty.  The national insurance pension system is undermining private provision.   Our state pension is so low because Governments have relied on private pensions to supplement national insurance, but private pension coverage is in serious decline.  This trend is being exacerbated by numerous scandals, increasing longevity and the state pension credit’s means-tested penalties on pensioners’ private income which create significant disincentives to saving.  Pensions have become an unsuitable investment for the majority of moderate earners.

Not only is the state pension too low, it is also too complex.  We have basic state pension (BSP), second state pension (S2P) and pension credit.  Even after a lifetime of ‘contributions’, a full BSP alone will need topping-up by means-tested pension credit, which penalises any private pension or earnings by at least 40%. 

The national insurance ‘contributory principle’ is really a myth.  Anyone coming into the country and never having contributed at all is still entitled to £114 per week pension credit, making the BSP irrelevant.  I believe all pensioners should receive a decent state pension, irrespective of their so-called ‘contributions’ via the labour force or complex credits.  Women and carers contribute to society in ways other than the waged labour force and should still be considered worthy of an adequate pension, as of right. 

Pension credit leaves millions of pensioners in poverty due to low take-up and also undermines private incentives to save or earn.  My solution is to merge BSP and S2P and pay every pensioner at least the pension credit level linked to average earnings increases each year.  This would be the only payment called a ‘pension’ and everyone will know how much they will receive and can plan accordingly.  If people know state pensions will be the equivalent of, say, £120 a week, but no more, the self-interest is clear.  If they want more than that they will have to either put money into long-term savings (called something other than pensions to avoid confusion with state payments) or work part-time in later life. 

This is affordable within current expenditure.  For example, contracting-out rebates cost over £10billion every year.   This money would be far better spent on increasing the state pension to a decent level.  We could save some of the £3billion annually spent on pensioner giveaway gimmicks, such as free TV licences, bus passes and winter fuel allowances. (Even those who live the whole winter in warm climes receive a winter fuel payment.)  Raising or abolishing the national insurance ceiling, admitting that national insurance is just a - very regressive – tax, could raise significant revenue. Abolishing higher rate tax relief on pension contributions, which costs over £10billion a year, would also free money to increase state pensions for all pensioners. 

The last three elements of my pension reform package would encompass, firstly, abolishing mandatory annuitisation, allowing people to choose how to spend their private savings, because state pensions would not be supplemented by means-testing.  Secondly, official encouragement of part-time work in later life and finally, compensation for the victims of pension scheme wind-ups to help restore confidence in Government and pensions.


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