An assessment of the Government's options for state pension reform
This report provides an independent assessment of the potential impact of the state pension reforms set out in the Government’s Green Paper: A State Pension for the 21st Century.
The research was commissioned by the National Association of Pension Funds (NAPF) who asked the PPI to consider the potential impact of the reforms on Government spending on pensions and on means-tested benefits, on the gainers and losers for the reforms, and on the potential wider impact on private pensions.
In April 2011 the Government published a Green Paper: A state pension for the 21st century. In the Green Paper, the Government set out four guiding principles for state pension reform:
· personal responsibility – enabling individuals to take responsibility for meeting their retirement aspirations in the context of increased longevity;
· fairness – ensuring an adequate level of support for the most vulnerable, ensuring everyone with a full contribution record should be entitled to a state pension above the standard level of meanstested support, and ensuring all groups are treated fairly;
· simplicity – simplifying the state pension so that it is easier for people to plan and save for their retirement; and
· Affordability and sustainability – given longer-term pressures on the public finances, any state pension reform must be affordable. Any options for reform must be cost neutral in each and every year to avoid placing an unsustainable burden on future taxpayers.
The Government has several concerns about the current state pension system. The Government is concerned:
· About the ways in which the current system of means-tested benefits could act as a disincentive to saving.
· That the complexity of the system creates too much uncertainty for people to understand what they will be entitled to when they retire and how to plan appropriately for their retirement.
· About the inequalities in the pension system; certain groups (for example, women and lower earners) receive lower than average incomes from the state pension.
· About the future sustainability of the state pension, in light of longevity increases and an ageing population.
In an attempt to address their concerns about the current state pension system, the Government has issued a Green Paper which consults on two broad options for reform of the state pension. The two suggested options for reform are:
1. An acceleration of the existing reforms so that the state pension evolves into a two-tier flat-rate structure more quickly, with State Second Pension (S2P) accruals becoming flat-rate by 2020 instead of 2030.
2. The creation of a single-tier flat-rate pension set above the current level of the Guarantee Credit element of Pension Credit (for example £140 per week in 2010 earnings terms) introduced for people reaching State Pension Age (SPA) after 2016, or the implementation date.