Government proposal to scrap the state second pension and implement a single payment would redistribute money from higher-earning pensioners to lower earners
State pension reform proposals for a flat rate single-tier pension could redistribute income from 5 million of the higher earning pensioners to 7 million of the poorest, according to independent research.
One of the options proposed by the government in its green paper A State Pension for the 21st Century is to scrap the state second pension (S2P), which provides an additional payment on top of the basic state pension for employees. Instead, a single state pension payment the equivalent of �140 a week in today's earnings terms would be paid to people reaching state pension age from 2016 onwards.
Analysis by the Pensions Policy Institute (PPI) found that such a move would be cost neutral to the government and would result in those on moderate salaries of �25,000 and above, who qualified for the S2P for more than 30 years, getting a lower total state pension than under the existing system.
About 5.2 million pensioners would lose an average of �18 a week by 2034 in today's earnings terms. But women and carers, particularly those who have taken time out of the labour market before 2002 or who have had very low earnings, the self-employed (who do not benefit from S2P) and those on job seeker's allowance would benefit, gaining an average of �23 a week by 2034 in today's earnings terms.
Pensioners who continue claiming the state pension well into old age could also benefit from a more generous rate of annual increase to pension payments.
PPI director Niki Cleal said: "The introduction of a single-tier state pension as proposed by the government of around �140 a week could be broadly cost neutral, but would lead to winners and losers.
"A single-tier pension is likely to be beneficial for some women, carers and some low earners who tend not to qualify for a high amount of state pension in the current system. The self-employed may also benefit, although they may have to pay higher national insurance contributions in the future."
A spokesperson for the Department for Work and Pensions said: "We are pleased that the PPI has found that these plans would make the state pension fairer for women, the self-employed and lower earners, and benefit 7 million people without requiring any extra spending.
"A single-tier pension would provide people with clear incentives to save and certainty and clarity over what their state pension will be worth when they retire. We're clear that anything contributed under the current system would be honoured."
The PPI said the reform would dramatically reduce the number of pensioners reliant on means-tested benefits. The proportion of pensioner households eligible to claim pension credit could fall from 35%, or 4.4 million pensioners, to only 5% (0.8 million pensioners) by 2055.
However, the single-tier state pension would only be paid to those retiring after its implementation, meaning a whole generation of people who have already reached state pension age could be left worse off.
End of contracting out
Cleal also warned that the single-tier option would mean the end of "contracting out", where money contributed through tax to the S2P is transferred into a pension fund of the employee's choice. Defined benefit or final-salary schemes benefit from about �5bn of this money each year.
Cleal said: "The single-tier pension could place additional burdens on employers and employees in defined benefit schemes in both the public and private sectors, as national insurance contributions would increase. The final impact on private pension scheme members would depend on how employers reacted to the government's state pension reforms."
The green paper includes a second option, which involves accelerating the pace of existing state pension reforms so that the state pension is a flat rate, but keeping the S2P element, by 2020 instead of by 2030 as currently planned. The PPI has concluded that this option could save the government �0.6bn a year by 2055, less than 0.1% of GDP.
But this change would not benefit any pensioners, and about 5.3 million would be about 50p a week worse off in today's money by 2034, increasing to 6.7 million pensions losing an average of �1.50 a week by 2055. But this option would enable pension savers to "contract out".
Joanne Segars, chief executive of the National Association of Pension Funds, which commissioned the research, said: "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.
"A revamped state pension would enable everyone to see that there is a clear foundation for their retirement, and that it pays to save. They can then build on this through their own pension and savings."
However the NAPF is calling on the government to give pension schemes five years' breathing space to prepare for the end of contracting out and to provide greater support for workplace pensions instead.
Source: http://www.guardian.co.uk/money/2011/jun/28/state-pensions-pensions
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