Women’s pensions reforms in Pensions Bill 2008
by Dr. Ros Altmann
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General Background Issues For Women’s Pensions
House Of Lords Briefing May 2008
Women’s working lives are very different from those of men. For example, when they have a child, half of all women will stop contributing to a private pension, whereas men will not (research from EOC and Scottish Widows shows this).
Women will continue to be penalised for the foreseeable future by the state pension system. They will still be treated less favourably than men, as a result of their lifestyle and the demands society places on them. In addition, of course, they are likely to have less private pension as well, which makes them more reliant on the state pension.
Obviously, if women’s working lives are interrupted by childbirth and caring, their lifetime earnings will be lower than for men. So any private savings they can afford to make during their working lives are lower than for men. Unfortunately women will still also be at risk of accruing less state pension entitlement too, even after the measures of this Bill. The situation will be better than it otherwise would be, but still not ‘fair’. This is because there will be no universal coverage of state pension and entitlement remains based on years of contributions or credits to the NI system.
Women will lose out if they are working in more than one job, each of which pays below the lower earnings limit. The EOC provided an example of a woman who works 3 hours a day as a cleaner, so she can be at home with her young children more (say £80pw) and in a pub at the weekends (earning another £75 a week). Both jobs together pay her £155 a week, but neither is above the Lower Earnings Level, so she will not build up any NI record at all, and no rights to any state pension. She would also not build up any entitlement in the personal accounts either as both jobs pay below the lower end of the earnings band. This is not an uncommon situation. The EOC estimate that 15,000 women and 5,000 men have two jobs which would qualify for BSP if added together , but are currently excluded. Surely we should make sure people are not penalised in this way by archaic or cumbersome qualification criteria that don’t fit in with modern women’s lives.
43% of female employees earn between £5,000 and £15,000 a year, so they are often at the lower end of the income scale. They cannot save consistently for 40 years, as many men could do, due to interrupted working lives. Personal accounts are particularly aimed at lower earners, but it is particularly lower earning women for whom they could be most dangerous. This is because they could find their personal account savings have been wasted and all they did was save money to replace pension credit or other means tested benefits that they would have otherwise received – and which their friends who did not bother contributing to personal accounts will receive anyway.
This lack of certainly about whether personal accounts will be suitable, affects women more than men because they accrue less private pension in the first place and will have less S2P entitlement. Many will still also have less than full BSP. Therefore, for women in particular, there are significant risks that it will not ‘pay to save’ in personal accounts.
How will the Government deal with this problem and avoid another pension scandal, like the one that led to the Financial Assistance Scheme? It is vital that women are given specific advice, not just generic ‘one size fits all’ advice that cannot encompass their particular problems. Recent research from Professor Gordon Clark and colleagues at Oxford University has again highlighted how women’s understanding of pensions and attitudes to risk are different from men’s, also that there are interesting differences between the needs and knowledge of single women versus married women and he highlights the need for advice to be tailored to particular groups.
Briefing On Women’s Pensions For Pensions Bill Reforms
- National Insurance and state pension:
- Provision to keep contributing to NI after pension age: These measures will allow women to contribute to national insurance even after they reach pension age (SPA). Obviously, this will increase women’s entitlement to basic state pension, which is good. However, for low income women, the interaction of state pensions and private income will mean that when they claim pension credit their earnings from work will suffer at least a 40% deduction (some will have 100% deduction). Therefore, there is a significant disincentive for women to actually keep on working past SPA, unless they are already well-0ff. The earnings disregard in pension credit is only £5 per week, and has remained the same for several years, why could it not be raised? We should be doing all we can to help women keep working, if they want to, into their 60’s or beyond, at least on a part-time and flexible basis. At the moment, the poorerst have major disincentives if they do so.
- Voluntary backdated NICs: The current proposals will, from 2010, allow people to buy up to 9 years of missing NI contributions . This could be a big help to women, but in practice there are several problems. Firstly, women will only be allowed to backdate their contributions up to 6 years ago, so many will not be able to get the full 9 extra years and some may get none. Secondly, women retiring between now and 2010 are excluded. Why not allow it from 2008?
- Reducing qualifying years to 30 for full BSP: From 2010, people will only need 30 full years of NI contributions to qualify for a full BSP. This is welcome of course, but still leaves many women at risk of not getting their entitlement if they retire between now and 2010. Without this reform the estimates are that 50% of women will retire without a full BSP, but after the reform, only 25% of women will not have a full BSP. Again, however, it will not be until 2025 that there will be parity between the proportion of men and women who retire with a full BSP. It would be more welcome to allow parity much sooner. Baroness Hollis has asked that there should at least be a universal Basic State Pension (as you know, I would much prefer to see a universal state pension well above the BSP level, to avoid the need for pension credit for almost everyone, treat women fairly overall and cut the huge costs and errors of administering the current complex system. This could be easily afforded if it was paid from age 75 ). As Baroness Hollis says, at the very least the Government should start keeping residency records immediately, so that such a system could be introduced in the future. This would be at least one step forward to where we need to be to end the discrimination between men and women as far as state pensions are concerned.
- S2P and additional pension: The Pensions Bill will consolidate additional state pension entitlements from 2020 onwards, to make it easier to cope with the various different bits of additional state pension. (There was Graduation Retirement Benefit from 1961-1975, SERPS from 1978-2002, S2P from 2002 onwards and S2P start to become flat rate after 2012 or so). Again this is welcome in terms of reducing some of the ludicrous complexity of state pensions, but there are a couple of problems. Firstly, the tying of BSP to earnings is to some extent offset by the fact that S2P in payment will only be tied to prices. It would surely be better to tie the whole of the state pension to earnings once in payment, otherwise we risk ending up with problems similar to those which have led to the demands for tying the BSP to earnings now! Secondly, and more fundamentally, women have far less chance of accruing a decent amount of S2P, due to their interrupted work careers. Last year the Secretary of State for Work and Pensions (Peter Hain) said that by 2050, people ‘who have worked or cared for about 40 years will receive about £145 of state pension in today’s earnings terms’. This would be great, however in order to achieve this amount, people will need about 43 years of NI contributions to S2P and women are less likely to have such a long record. Therefore, they are doing better on BSP, but still not getting enough S2P to lift them out of the means testing trap. If women still miss out on S2P credits (and those credits only started in 2002) there will continue to be millions of women ending up in poverty because the BSP is not enough to live on, they don’t have enough S2P credits and they then end up either on pension credit or entitled to it but not claiming it.
- Caring: At the moment, women must be caring for at least 20 hours per week to qualify for credits to NI pension. These 20 hours have to be for one person and are determined by benefit entitlements. Surely we need to be able to aggregate the number of hours spent caring, to find the total number. Also, it would be good to make it easier for women to prove they are caring, without having to depend on benefit take-up. Why could we not allow health or social care professionals to certify that the person is caring in a bona fide manner? This would again allow more women to accrue pension rights.
- Trivial commutation limit and pension credit for women: Entitlement to pension credit is means tested and currently the capital disregard is just £6000. However, for personal accounts, the trivial commutation limit will be £15,000 so a woman (or man!) who has less than £15,000 in their pension account will be allowed to take all of this as a lump sum. Unfortunately, if they then are in the 40% or more of pensioners who will be entitled to pension credit (more likely to be women than men) they will find that their pension fund has counted against them for their state pension credit. This may encourage them to go out and spend the extra £9,000 so that they are only left with £6,000 for the capital disregard, rather than keeping the full amount in case they need money in future. I would have thought it makes more sense to raise the pension credit capital disregard to the trivial commutation limit to stop such perverse incentives and also to help make saving more worthwhile for such people?