A new pensions settlement: our proposals for reform
Our first priority is to make it easier for more people to save more for their retirement. To achieve this, in 2012 we will introduce the following:
36. A new scheme of personal accounts, which will provide a straightforward opportunity to contribute to a high-quality, low-cost savings vehicle. The scheme will have the following key features:
- Employees will contribute 4 per cent of a band of earnings of between around £5,000 a year and £33,000 a year.
- Employers will make minimum matching contributions of 3 per cent on the same band of earnings.
- A further 1 per cent will be contributed in the form of normal tax relief.
- There will be support for all employers during the introduction of compulsory employer contributions:
- their contributions will be phased in over a three-year period, at the rate of 1 per cent each year;
- the contribution rate will be set out in primary legislation to create stability;
- the priority is to design the scheme and the transition phase so that burdens on employers are minimised; and
- we will consult on transitional support for the smallest businesses and whether a longer phasing period is needed.
- Automatic enrolment for employees into either the new personal accounts scheme or their own employer’s occupational scheme providing it meets a minimum standard:
- Employees will be able to opt out of this provision, in which case the employer would not contribute;
- Non-employees, including the self-employed and non-workers, will be able to opt into the scheme.
The new system of personal accounts with automatic enrolment will provide a simple and straightforward way for people to take personal responsibility for the income they want in retirement.
Initial analysis suggests that the best delivery model for the personal accounts scheme is that proposed by the Pensions Commission, but the Government will conduct further analysis of this, and industry alternatives, in order to strike the right balance between value for money for the taxpayer and value for money for the saver. We will bring forward proposals later this year.
Secondly, in order to make the system of personal accounts effective, we will provide a solid foundation on which people can save. To achieve this, we will reform state pensions so that they are simpler and more generous, and will ensure that pensioners share in rising national prosperity.
37. During the next Parliament, we will re-link the uprating of the basic State Pension to average earnings. Our objective, subject to affordability and the fiscal position, is to do this in 2012, but in any event by the end of the Parliament at the latest. We will make a statement on the precise date at the beginning of the next Parliament.
We will also:
- reform the State Second Pension so that it becomes a simple, flat-rate weekly top-up to the basic State Pension. Accruals will gradually start to become flat rate at the same time as we start to uprate the basic State Pension by earnings. We estimate that the State Second Pension will become completely flat rate around 2030 or shortly afterwards; and
- ensure that, before implementing the earnings link of the basic State Pension, means-tested provision continues to be focused on those with small savings, by taking steps from 2008 to target the Pension Credit on this group.
Thirdly, from 2010, we will make the State Pension fairer and more widely available.
38. We will radically reform the contributory principle, by recognising contributions to society while retaining the link between rights and responsibilities. This will be achieved by the following measures:
- streamlining the contribution conditions to the basic State Pension by reducing the number of years needed to qualify to 30;
- replacing Home Responsibilities Protection with a new weekly credit for those caring for children;
- introducing a new contributory credit for those caring for severely disabled people for 20 hours or more per week;
- abolishing the initial contribution conditions to the basic State Pension, so that caring for children or the severely disabled will build entitlement to the basic State Pension, without having to make a minimum level of contributions; and
- making a number of other simplifications to the rules for entitlement to the basic and State Second Pensions, and abolishing a number of complicated and out-dated provisions such as adult dependency increases and autocredits.
The current system is unfair to those with caring responsibilities, who tend to be women, and means that their social contributions are not fully recognised by the state pension system. This modernised contributory system will better reflect the different ways in which people contribute to society, and will ensure that carers have improved opportunities to build State Pension entitlements.
Fourth, we will support and encourage extended working lives.
39. We will:
- gradually raise the State Pension age in line with gains in average life expectancy. The State Pension age for women is already due to rise from 60 to 65 between 2010 and 2020, to equalise with men’s State Pension age. There will be a subsequent rise for both men and women which will follow the same approach, beginning with a rise from 65 to 66 over a two-year period from 2024, then again by one year over a two-year period from 2034 and from 2044; and
- take measures to support longer working, as set out in the publication A new deal for welfare: Empowering people to work, and consider greater flexibility around, and communication of, State Pension deferral.
We note the Pensions Commission’s suggestion that the age at which people become entitled to the Guarantee Credit in Pension Credit could remain at 65, in order to protect those with the lowest life expectancies. We think this is an issue that must be considered nearer the relevant time in the light of the available evidence about inequalities in life expectancy and trends in working among older people.
We also propose to periodically commission reviews, drawing on a range of independent expert advice in the light of emerging evidence on demographic change.
40. The increased State Pension age will share the growth in life expectancy between time spent in work and time spent in retirement, and it will secure the financial stability and sustainability of the state pension system for the long term.
Finally, we will streamline the regulatory environment.
41. We will do this by:
- abolishing contracting out for defined contribution schemes at the same time as re-linking the uprating of the basic State Pension to average earnings;
- reducing burdens on schemes by bringing forward legislation to allow schemes to convert Guaranteed Minimum Pension rights into scheme benefits;
- introducing a rolling deregulatory review of pensions regulation, in light of the Pensions Act 2004;
- piloting a Pensions Law Rewrite Project; and
- re-examining the existing regulatory landscape.
Any such simplifications will be aimed at easing the regulatory burden on employers who provide good occupational pensions. They, and other measures in the proposed reform package, will be taken forward with regard to the Government’s wider agenda to promote better regulation and reduce the administrative burdens on business.
Key outcomes of the reforms
- Everyone will be able to enrol into a new, low-cost personal account;
- Automatic enrolment ensures that employees will be saving for a pension unless they actively decide not to do so;
- Up to 10 million people could be saving in a personal account;
- By retirement, their pension funds could be worth up to around 25 per cent more because of lower charges;
- In 2010, 70 per cent of women reaching State Pension age will be entitled to a full basic State Pension, compared to 30 per cent now;
- By 2025, over 90 per cent of women and men reaching State Pension age will be entitled to the full basic State Pension – compared to about 80 per cent without reform;
- By 2050, the basic State Pension could be worth twice as much as if it had been linked to prices;
- Anyone who has been in employment or caring throughout their working life could receive £135 a week at retirement in state pensions – which is £20 a week above the guaranteed income level;
- Fewer pensioners – down to around a third by 2050 – could be entitled to Pension Credit.