Research released by NAPF on June 28, 2011 (An assessment of the Government’s options for State Pension reform, Pensions Policy Institute, June 2011), analyses projected reforms to the UK system. Of the options considered, the study shows that the single-tier payment may be of most benefit to pensioners as a whole. It may, however, reduce income for some and negatively impact on defined benefit pension funds. What did results show about this system change?
UK State Pension System to be Reformed
The one given at the moment is that the state pension in the UK will change in the near future. At the moment, there are two ways this could go. The first would move the current two-tier system (i.e. basic and second state pensions) to a flat rate weekly payment of £140 (in today's money) for all pensioners. The second would retain elements of the additional state pension incorporating it into a flat rate structure.
Who Would Benefit From a Single-Tier State Pension?
According to the NAPF study moving to a 'one size fits all' flat payment system would benefit many lower income pensioners. This could boost the incomes of women, carers, low earners and the self-employed. This is evidenced in an analysis of pensions credit (a means-tested benefit for lower earners).
At the moment 35% of pensioners would qualify for this additional payment by 2055. If the system changed to single-tier, only 5% would need additional assistance. Using a more defined and simpler system would also encourage people to save for retirement as they would know how much of a payment to expect. This system would not add an additional burden in terms of government costs so its implementation would be cost-neutral.
When Would a Flat Rate Pension Payment System Not Work?
Some pensioners will not benefit from this change, however. According to The Guardian ("Single-tier state pension 'will benefit poorer retirees", Jill Insley, June 28, 2011) around 5.2 million people would lose an average of £18 per week (based on today's money) by 2034. Any new system would also not be applied retroactively and current pensioners would not benefit from future changes.
Removing the second state pension would also impact on defined benefit funds to the level of around £5 billion a year as it would effectively shut down the option to 'contract out'. In the Guardian report, PPI Director, Niki Cleal, stated that this 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."
This particular problem may, however, be partly solved with help from the government. The Chief Executive of NAPF, Joanne Segars ("State pension reform would save millions from means testing", NAPF, June 28, 2011) states that: "With the right support from the Government schemes can make these changes and be put on a firmer financial footing.” This could involve initiatives such as giving companies a five-year period to prepare for changes, implementing adequate support and HMRC structures and giving schemes more flexibility.
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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