Citywire Pension predictions 2012
by Dr. Ros Altmann
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2012 could be a momentous year for pensions. In addition to the radical reform of workplace private pension provision, as auto-enrolment begins to enrol every worker into an employer pension scheme, there is also likely to be a radical reform proposal for State pensions as well. The Government has promised a White Paper on simplifying and improving state pensions, and I would expect this will recommend a flat-rate single state pension, above the current Pension Credit level, that will be paid to everyone with a full national insurance record. If this is enacted, it would give many women and the self-employed much better pensions and will help to alleviate the means-testing penalties for private pensions and earnings. At the moment, the state pension undermines private pension saving and, without radical state pension reform, there is a real danger that pensions would turn out not to be a suitable investment for many low or moderate earners who are going to be automatically enrolled. The main problem with this proposal is that millions of current pensioners will want it too, but the plan seems to be that the new arrangements will only apply to future retirees. Given the fiscal constraints, the Government is in a very difficult position, but the over-riding need is for a radical state pension overhaul, ending the mass means-testing of pensioners and ensuring it is safe to save.
Public sector pensions:
As private sector defined benefit pension schemes are likely to continue to die out, it is clear that public sector workers will retain their defined benefits. During 2012 I expect to see continued negotiation over changes to public sector pensions while each public sector scheme works out details of its new pension arrangements for the future. There are several issues yet to be settled and I believe that the Government is not negotiating as comprehensively as it should. Just looking out one or two years, surely the Government should be integrating its plans for public sector pension reform with its state pension reform agenda. In particular, if state pension reform entails ending contracting-out, then an increase in National Insurance needs to be factored into the discussions now, rather than locking into a long-term deal too soon. In the past, public sector workers in unfunded public sector pension schemes have not specifically contributed to the additional state pension rights that have been contracted-out into their pension scheme. If contracting-out ends, then public sector workers will be accruing more state pension than before, which would suggest a need to change the public sector pension scheme to reflect this. This is a very complex and delicate area and surely should be factored into the current public sector pension reform agenda. If not, then state pension reform could prove much more difficult – and expensive – than expected. It is also possible the courts will rule that changing pension uprating from rpi to cpi is unlawful. Again, this would increase the costs of public sector pensions and could give rise to the need for other reforms to offset rising costs.