A State Pension for the 21st century

Jonathon Howard, head of corporate clients at Courtiers Investment Services, discusses the implications of the recent green paper for State Pension reform.

The government has just published its green paper for State Pension reform, entitled A State Pension for the 21st Century. I thought nothing of the title but as I read the document through, it occurred to me that there are people alive right now who will be drawing their State Pension well into the 22nd century. All of a sudden the seemingly ‘radical’ suggestions contained within appeared out-dated before they’d even been implemented. What we need is a State Pension for the 21st and 22nd centuries. We can see where we go after that.

The problem the government is trying to address is the UK pension system has become so bogged down in legislation, inequity and disincentives to save that the population has disengaged with the concept altogether. As far as state pensions go most people just close their eyes and hope for the best, and I include the Treasury in that summary.

According to recent DWP research, 71% of respondents felt that ‘sometimes pensions seem so complicated [they] cannot really understand the best thing to do.’ That is a staggering figure. Only 23% said they ‘knew enough about pensions to decide with confidence how to save for retirement.’ I imagine the remaining 6% didn’t have a strong opinion either way, which puts them firmly into the former category – you either know what to do or your don’t.

This is hardly surprising when you consider that even the Department for Work and Pensions cannot always get its figures right, and that it includes a caveat on the State Pension forecast that tells the recipient not to rely on the figures as they ‘could be different from the amounts we have estimated and could actually be reduced to nil.’

Barrier to buy-in

The interaction of state pensions and means-tested support is also a potential barrier to full public buy-in. It has been well reported over the last year or two that, without a significant rethink, NESTs were going to bring about the perverse reality that those who could least afford to would begin replacing means-tested benefits with personal contributions. Who in their right minds would pay money into a pension if all it meant was that you’d lose the equivalent in government hand-outs?

Green Paper proposals

So do the proposals contained in the Green Paper adequately address the concerns of the population? Predictably, as with all things pensions, it isn’t as simple as that.
The key proposal is that the existing two-tiered State Pension should be scrapped, in favour of a single-tier universal payment equivalent to £140 per week in today’s money.

The Green Paper actually sets out two options, the first being to move the state second pension to a flat rate sooner than scheduled, thereby allowing contracting out via defined benefit schemes to continue. I did not get the impression that the government has much appetite for this approach so will focus on the single tier option.