Who would believe it? At last some good news on pensions.

by Dr. Ros Altmann

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After years of hearing about the pensions crisis, things may be about to change. The Government plans to increase our ludicrously low state pension to a flat-rate basic level of £140 a week. This would not be means-tested, it would just be paid to all who qualify. If only this had been done years ago, maybe our pensions crisis would have been under control already.

The last Government presided over the demise of our once-thriving pension system. A merry-go-round of Pensions Ministers made change after change that merely added new complexities while failing to address the fundamental problems. These problems stem from the fact that, as highlighted in international studies, the UK has just about the lowest state pension in the developed world. It is also by far the most complex and unfair to many people, especially women.

Most people have no idea what state pension they will be entitled to. This is because anyone retiring can receive many different bits of State Pension. There is the Basic State Pension (up to £97-65 a week), but in addition, some will also be entitled to the Second State Pension, plus some State Earnings Related Pension (SERPS), plus a Graduated Pension. All of these have different qualification criteria and come from contributions made in different years. And if all these are not enough, nearly half of pensioners can claim a complex, means-tested Pension Credit, which consists of a Guarantee Credit and a Savings Credit. What a mess!

And what's more our State Pension penalises private pensions. Around half of pensioners are at risk of seeing some or all their private pension effectively taken away by the State Pension system means test.

In 1994, Gordon Brown said he wanted to end the means-test for the elderly, but he actually increased means-testing dramatically when in office. From 2000-2005 I advised the Labour Government and warned of the disincentives entailed in mass means-testing and pension complexity. I recommended introducing a universal flat-rate pension. But this was ignored. In 2005, the Turner Commission again failed to grasp the opportunity for such radical reform. So many missed opportunities.

The Coalition is about to launch a new national pension scheme (called NEST) specifically targeted at low to moderate earners, and automatically enrol all workers into a pension scheme. Without fundamental reforms of the state pension, Government might end up putting workers into a pension which would ultimately be partly or totally removed from them by the means-test, so it is vital that the Government deals with this issue.

It seems as if they are intending to do just that.
Ministers plan to launch a Green Paper which will propose introducing a flat rate State Pension, which combines the Basic and all the other bits of state pension into one payment of £140 a week. This would be a new pensions settlement for the future, recognising that the current system is not fit for purpose and that small increases to the state pension each year are not enough to put us on the right path.

This £140 pension will end the top up payments and means-testing which are currently added to the Basic State Pension and just pay everyone the same amount. Most women would receive a much better state pension, without having to claim Pension Credit and without penalty to their private savings. There are some people currently entitled to more than £140 a week and they would still receive that higher amount.

Imagine it - one decent, flat-rate state pension that everyone could understand. This would be the best news for pensions in years!

This system would have many advantages. Firstly, it would be simple and everyone would know what they will get from the state, with millions of pensioners, especially women, getting a better pension. It would end the need to means-test many new pensioners and would end the disincentives to saving entailed in the current system. It would make the system of auto-enrolment suitable for all workers and would also mean that nobody would need to be forced to buy an annuity, since they will not end up on means-testing and would be free to do what they wanted with their savings. This change would provide real justification for a later state pension age, with waiting longer being rewarded by a much better pension.

This probably sounds hugely expensive, but actually it is likely to be cost neutral. Not all pensioners will get much higher pensions, some are already entitled to more than just the Basic State Pension already. There will also be savings in administration costs, as officials will not have to administer the hugely complex pension credit payments. The Savings Credit will not have to be paid any longer, again saving money. But the main point is that a much better, higher state pension would be a quid pro quo for asking women to wait longer to receive it.

If there was a flat-rate state pension, the Government could end the current practice of allowing people to 'contract out' of the State Second Pension. This could save up to £8billion in National Insurance contributions each year. This extra revenue would also save money in the longer term, because public sector pension schemes would not have to pay the replacement State Second Pension from scheme pension age, it would just be paid from state pension age.

After years of watching our pension system falling apart, it seems that the Coalition Government's new Pensions Minister, Steve Webb, may finally be getting to grips with the inadequacies of the UK state pension. This new system could help reduce pensioner poverty, end mass-means-testing and encourage people to save. It would be fair, simple, understandable and is affordable. The state would pay a decent social welfare minimum pension on which private savings can safely be built. The sooner we get it, the better.


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