Meeting the five tests for reform
We believe the reform package set out in this Paper meets the five tests for reform:
Personal responsibility
42. Automatic enrolment will ensure that employees have automatic access to a retirement savings vehicle. We will also ensure that the self-employed and non-workers have access to the scheme of personal accounts. Everyone will have the opportunity to save easily, as an essential step towards tackling undersaving for retirement.
43. We need to be clear that individuals must be responsible for their own plans for retirement. The reforms will ensure the provision of high-quality savings vehicles, and a solid state foundation to private savings. But the choice of how much to save, the level of risk to take with investments, and how long to work must be available to the individual. That provides the right balance of choice and support for individual responsibility.
44. Through these reforms people should see greater return from their private savings than they would under today’s system.
Fairness
45. Protecting the poorest. We are committed to uprating the Guarantee Credit for pensioners in line with earnings growth. This means that the value of the £114 guaranteed minimum income for single pensioners today will continue to keep pace with the growth in national wealth.
46. We are creating a system which establishes a new contributory principle for state pensions. We are committed to the principle of giving ‘something for something’, rewarding those who have worked and cared for decades before retiring. Our measures to reform the contributory rules for the basic State Pension and State Second Pension will achieve that.
47. Cutting the number of qualifying years required for entitlement to the basic State Pension will immediately give fairer outcomes, particularly for women. All those who have worked or cared for 30 years will get full entitlement to the basic State Pension. Under the current system, around half of women reaching State Pension age in 2010 would have received a full basic State Pension. Under our reforms, that proportion will rise to around 70 per cent. And, by 2025, over 90 per cent of people reaching State Pension age will get a full basic State Pension.
48. We will widen access to high-quality private savings schemes. We expect that around 6 to 10 million people might be enrolled in the new scheme of personal accounts once it is fully rolled out.
49. We have set the rate of contribution for the new scheme of personal accounts so as to strike a fair balance between the contribution needed from employers and from employees. We are also setting a fair and lasting balance between the generations. Current workers must both pay for provision for today’s pensioners (through National Insurance) and save more for their own future. We have had to strike a balance between what it is right and reasonable for them to provide in order to improve the situation for those retiring in the next decades, the rate at which we can afford to uprate the basic State Pension, and the expectation on today’s and tomorrow’s workers to save more for themselves.
Simplicity
50. The Pensions Commission observed that “the UK has the most complex pensions system in the world”. The combination of our reforms to state and private pensions will dramatically simplify the system, and make the decision to save a very straightforward one for individuals.
51. Our reforms of state provision will simplify the system considerably. The earnings-linked foundation of the basic State Pension will ensure that the decision to save can be more straightforward. Our reforms to coverage will ensure that many more people can be confident of entitlement to the full basic State Pension.
52. Automatic enrolment gives access to private savings vehicles to people of working age. For eligible employees, unless they choose to opt out, joining that scheme will be automatic. Taken together, these reforms will mean that it is much simpler for individuals to save.
53. We will also simplify the rules and structure for private provision through:
- changes to contracting out which will help to simplify the savings decision; and
- a review of current legislation and the regulatory landscape.
Affordability
54. Figure 9 shows the latest cost figures based on a 2012 start-date for the earnings uprating of the basic State Pension. As paragraph 37 sets out, our objective, subject to affordability and the fiscal position, is to uprate the basic State Pension by earnings from 2012 but in any event at the latest by the end of the Parliament. We will make a statement on the precise date at the beginning of the next Parliament.
Figure : Projected costs of State Pension reform, UK
| Cost of state reform package (£ billion, 06/07 prices) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| £bn, cash | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2030 | 2040 | 2050 |
| Reform costs: | ||||||||||||||||
| Pension Credit reforms | 0.6 | 1.2 | 1.8 | 2.9 | 4.2 | 5.5 | 6.8 | 8.1 | 9.4 | 10.7 | 12.1 | 13.5 | 15.1 | 38.6 | 86.0 | 201.7 |
| Basic State Pension reforms | 0.0 | 0.0 | 0.0 | 0.0 | 0.7 | 1.4 | 2.2 | 3.1 | 3.9 | 4.9 | 5.9 | 6.9 | 8.2 | 34.2 | 84.9 | 157.6 |
| State Second Pension reforms | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 0.1 | 0.1 | 0.3 | 3.5 | 13.2 | 26.9 |
| State Pension Age change | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | –11.4 | –35.2 | –104.0 |
| Total costs of State Pension reform | 0.6 | 1.2 | 1.8 | 2.9 | 4.9 | 6.9 | 9.1 | 11.1 | 13.3 | 15.6 | 18.0 | 20.5 | 23.6 | 64.9 | 148.8 | 282.4 |
| Total pensions expenditure with reform | 74 | 78 | 82 | 85 | 90 | 95 | 100 | 106 | 111 | 117 | 123 | 129 | 136 | 248 | 434 | 728 |
| £ bn, 2006/07 prices | ||||||||||||||||
| Reform costs: | ||||||||||||||||
| Pension Credit reforms | 0.6 | 1.1 | 1.6 | 2.6 | 3.6 | 4.6 | 5.5 | 6.3 | 7.1 | 7.9 | 8.7 | 9.5 | 10.3 | 20.0 | 33.8 | 60.1 |
| Basic State Pension reforms | 0.0 | 0.0 | 0.0 | 0.0 | 0.6 | 1.2 | 1.8 | 2.4 | 3.0 | 3.6 | 4.2 | 4.8 | 5.6 | 17.7 | 33.3 | 47.0 |
| State Second Pension reforms | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 0.1 | 0.2 | 1.8 | 5.2 | 8.0 |
| State Pension Age change | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | -5.9 | -13.8 | -31.0 |
| Total costs of State Pension reform | 0.6 | 1.1 | 1.6 | 2.6 | 4.2 | 5.7 | 7.3 | 8.7 | 10.2 | 11.6 | 13.0 | 14.4 | 16.1 | 33.6 | 58.4 | 84.1 |
| Total pensions expenditure with reform | 70 | 72 | 73 | 75 | 77 | 79 | 81 | 83 | 85 | 86 | 88 | 90 | 93 | 128 | 170 | 217 |
| per cent of GDP | ||||||||||||||||
| Reform costs: | ||||||||||||||||
| Pension Credit reforms | 0.0 | 0.1 | 0.1 | 0.2 | 0.2 | 0.3 | 0.4 | 0.4 | 0.4 | 0.5 | 0.5 | 0.5 | 0.6 | 0.9 | 1.3 | 1.9 |
| Basic State Pension reforms | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 0.1 | 0.2 | 0.2 | 0.2 | 0.2 | 0.3 | 0.3 | 0.8 | 1.3 | 1.5 |
| State Second Pension reforms | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 0.2 | 0.2 |
| State Pension Age change | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | -0.3 | -0.5 | -1.0 |
| Total costs of State Pension reform | 0.0 | 0.1 | 0.1 | 0.2 | 0.3 | 0.4 | 0.5 | 0.5 | 0.6 | 0.7 | 0.8 | 0.8 | 0.9 | 1.6 | 2.2 | 2.6 |
| Total pensions expenditure with reform | 5.2 | 5.2 | 5.2 | 5.1 | 5.2 | 5.2 | 5.2 | 5.2 | 5.2 | 5.2 | 5.2 | 5.2 | 5.2 | 5.9 | 6.5 | 6.7 |
Notes:
- Source: The figures are based on DWP long-term projections of United Kingdom benefit spend consistent with the Budget Report 2006 and DWP estimates of the costs of reform measures.
- Pension Credit reform costs include cost of earnings uprating the Guarantee Credit from 2008/09 and reforms to Savings Credit.
- Basic State Pension reform costs include net cost of earnings uprating the basic State Pension, improvements to BSP coverage, and reforms to ADIs.
- State Second Pension reform costs include net costs of changes to S2P accrual and coverage.
- State Pension age reform costs include savings on pensioner benefits and additional spending on working age benefits.
- Pensions expenditure includes Basic State Pension, State Second Pension, Pension Credit and other pensioner benefits: Winter Fuel Payments, over 75s TV licences, age-related payments and Christmas Bonus. Costs of State Pension reform also include changes in spending on Housing Benefit and Council Tax Benefit among pensioners and additional spending on working age benefits that results from increasing state pension age.
- Costs associated with Personal Accounts have not been included.
- Figures exclude administrative costs and tax revenue implications of reform.
- Abolition of Contracting Out for DC schemes from 2012 decreases Contracting Out rebate revenue foregone – by £4bn to £5bn per year in 2006/07 prices; this is not included in the figures. Abolition also increases S2P expenditure in the future – this is included in the figures.
- The savings from SPA equalisation in the period 2010 to 2020 are reflected in the expenditure totals.
- Figures refer to financial years – 2020 is 2020/1.
- Increases in GDP from higher employment as State Pension age rises after 2020 are not taken into account.
Sustainability
55. Fundamental to the problems we face with pension provision today is a lack of trust and understanding between individuals, employers and the state as to their respective roles and responsibilities in pension provision. We need to reset that balance. But we also need to reform the system so as to give trust and confidence to all parties that this is a sustainable deal for the long term. We need consensus that this is a sensible way to strike the balance. And we need to set up the system in such a way that it can respond flexibly to future societal changes.
56. The National Pensions Debate was established in February 2005, with the second phase beginning in December that year. Overall, the Government has heard the views of nearly 10,000 people in face-to-face discussions and via DWP’s website.
57. This was just part of an extensive programme of Government consultation with stakeholders. We are confident that the solution we have reached strikes the right balance between the views of all those parties affected. The National Pensions Debate clearly shows that out of the four alternatives identified by the Pensions Commission, people want a solution that strikes a balance between saving more, redirecting state spending on pensioners, and a rise in the average retirement age. Our proposed reforms strike exactly that balance.