The Single-tier State Pension: Part 1 of the draft Pensions Bill
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House of Commons
Work and Pensions Committee
The Single-tier State
Pension: Part 1 of the
draft Pensions Bill
Fifth Report of Session 2012–13
Volume II
Additional written evidence
Ordered by the House of Commons
to be published 26 March 2013
Published on 4 April 2013
by authority of the House of Commons
London: The Stationery Office LimitedThe Work and Pensions Committee The Work and Pensions Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Work and Pensions and its associated public bodies. Current membership Dame Anne Begg MP (Labour, Aberdeen South) (Chair) Debbie Abrahams MP (Labour, Oldham East and Saddleworth) Mr Aidan Burley MP (Conservative, Cannock Chase) Jane Ellison MP (Conservative, Battersea) Graham Evans MP (Conservative, Weaver Vale) Sheila Gilmore MP (Labour, Edinburgh East) Glenda Jackson MP (Labour, Hampstead and Kilburn) Stephen Lloyd MP (Liberal Democrat, Eastbourne) Nigel Mills MP (Conservative, Amber Valley) Anne Marie Morris MP (Conservative, Newton Abbot) Teresa Pearce MP (Labour, Erith and Thamesmead) The following Members were also members of the Committee during the Parliament: Harriett Baldwin MP (Conservative, West Worcestershire), Andrew Bingham MP (Conservative, High Peak), Karen Bradley MP (Conservative, Staffordshire Moorlands), Ms Karen Buck MP (Labour, Westminster North), Alex Cunningham MP (Labour, Stockton North), Margaret Curran MP (Labour, Glasgow East), Richard Graham MP (Conservative, Gloucester), Kate Green MP (Labour, Stretford and Urmston), Oliver Heald MP (Conservative, North East Hertfordshire), Sajid Javid MP (Conservative, Bromsgrove), Brandon Lewis MP (Conservative, Great Yarmouth) and Shabana Mahmood MP (Labour, Birmingham, Ladywood) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/workpencom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Committee staff The current staff of the Committee are Carol Oxborough (Clerk), David Foster (Committee Media Adviser), James Clarke (Inquiry Manager), Judy Goodall (Committee Specialist), Daniela Silcock (Committee Specialist), Emma Sawyer (Senior Committee Assistant), Hannah Beattie (Committee Assistant). Contacts All correspondence should be addressed to the Clerk of the Work and Pensions Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2839; the Committee's email address is workpencom@parliament.uk
3 List of additional written evidence (published in Volume II on the Committee’s website www.parliament.uk/workpencom) 1 Aegon Ev w1 2 Aon Hewitt Ev w2 3 aquilaheywood Ev w6 4 Aviva Ev w8 5 British Australian Pensioner Association Inc. Ev w10 6 Civil Service Pensioners' Alliance Ev w12 7 Citizens Advice Ev w14 8 EEF Ev w17 9 Madeline Fox Ev w20 10 GMB Ev w21 11 Stephen Hawley Ev w23 12 Hymans Robertson Ev w24 13 International Consortium of British Pensioners Ev w27 14 Anthony VT Johnson Ev w28 15 Lynne Johnson Ev w29 16 Jill Klee Ev w30 17 Mercer Ltd Ev w31 18 National Federation of Occupational Pensioners Ev w34 19 National Pensioners Convention Ev w36 20 James Nelson Ev w39 21 Pensions Action Group Ev w43 22 Sheila Telford, Chairman, Canadian Alliance of British Pensioners Ev w44 23 Police Federation of England and Wales Ev w45 24 Public and Commercial Services Union Ev w47 25 National Union of Rail, Maritime and Transport Workers Ev w48 26 Anne Street Ev w50 27 Towers Watson Ev w51 28 UNISON Ev w56 29 Unite Ev w56 30 Tony Lynes Ev w61
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Written evidence
Written evidence submitted by Aegon
Summary
1. Aegon is broadly supportive of the proposed changes to the state pension. They should make a major
contribution to reducing dependency on income-related (ie means tested) benefits and thus provide a better
foundation for private saving.
2. Means testing will not be entirely eliminated, however. The impact of Housing Benefit, in particular,
could continue to erode the value of private savings for many people.
3. It will be important that the reforms are seen to be fair in how they take account of previous National
Insurance (NI) contributions and existing entitlements. The White Paper and the Draft Bill give rise to a
number of issues around the treatment of those who have been self-employed or who have contracted out of
the State Second Pension (S2P) for significant periods.
4. The changes also need to be communicated effectively and widely understood in order for any beneficial
impact in terms of encouraging private saving to be realised.
Means-testing
5. The reforms proposed in the White Paper and the Draft Bill will ensure that many more people get a
higher state pension as of right, without having to claim means tested uplift. This is a welcome advance in
many respects.
6. The current extent of means testing in retirement means that many people currently face real disincentives
to save. Many more people, for whom it would be beneficial to save, worry that they will not see the full
benefit of that saving and are so also deterred.
7. As the Government has suggested, removing these disincentives will help underpin the reform of private
pensions: greater certainty around what to expect from the state, combined with the requirement for employers
to contribute, means that for those being automatically enrolled into a private pension now and over the coming
years, it will nearly always “pay to save”.
8. It is important to note, however, that the issue of means testing in retirement is not solely a “pensions”
issue. Housing Benefit and Council Tax Benefit, for example, also play a significant role for many pensioners.
9. We have not examined in detail the Government’s proposals for reform to these and other means tested
benefits. Most of the debate has been around the impact on working age households. There will be important
impacts on both existing pensioners and, in terms of their incentives to save while they remain in the workforce,
those who will be eligible for the new single-tier pension. We hope the Committee will examine these issues
and ensure they are given sufficient weight in scrutinising both these reforms and changes to the welfare system.
10. As always with issues around means testing, a balance will need to be drawn between targeting assistance
where it is most needed, and ensuring that the value of private saving is not unduly eroded.
Accrued Entitlements
11. Perhaps the biggest single issue the reforms set out in the Draft Bill need to address, is how to account
fairly for existing entitlements and National Insurance contributions as we effect the transition from the current
system to the new.
12. It is in everyone’s interests that the state pension framework is stable and commands wide public
confidence. For that to be the case, it needs to be fair, and to be seen to be fair.
13. There are two distinct but related concerns in the way the Bill takes into account previous National
Insurance contributions.
The Self-employed
14. Under the current system, National Insurance contributions (NICs) made by the self-employed have not
counted towards Additional State Pension (SERPS or S2P). Under the proposed new system, however, pre-
commencement qualifying years appear to count towards the new single-tier pension in exactly the same way
as those for employed persons.
15. While this may be interpreted as a generous extension of the benefits of a full state pension, it also raises
questions around the existing disparity between the rates of National Insurance paid by employed and self-
employed people. While this is properly a matter for the Treasury and subsequent Budgets, we feel it would
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Contracted-out Benefits
16. It is not clear to us how the “contracted-out reduction” (Schedule 1, Part 2, paragraph 5 of the Draft
Bill) will operate. We would welcome further clarity on this point and hope that the Committee will press
Ministers and officials on this point.
17. The formulation in the White Paper and the Draft Bill appears to allow those with existing entitlements
in contracted-out schemes effectively to “bank” those benefits and continue to build up (post-commencement)
qualifying years for the single-tier state pension. This could result in their qualifying for the full amount of the
single-tier pension, while also receiving the benefits of their contracted-out contributions via their contracted-
out scheme.
18. Those who have spent the same period contracted in and paying full National Insurance contributions
are subject to different transitional treatment. Those with an S2P entitlement may be entitled already to more
than the new single pension and again can “bank” this. They do not, however, then receive any further state
pension entitlement for future years of NI payments.
19. The way in which the contracted-out reduction is determined will have a bearing on relative outcomes.
Communication of the Reforms
20. The Government and others have “sold” the reforms in part on the basis that they should help individuals
to be clearer about what they will get from the state when they retire, and provide a more secure basis for
private saving.
21. Once the single-tier system reaches “steady state” it will undoubtedly be much easier for people to
understand, even if they do not have full contribution records.
22. That steady state will not exist fully for some time. During the transition, there will be large numbers of
people with significant contribution records, in many cases a combination of contracted-in and contracted-out,
some periods in self-employment or out of the workforce altogether, who will need to know what their existing
entitlement is and what they can do to augment it.
23. The proposed state pension statements set out in the White Paper are a welcome initiative. However,
they depend on individuals requesting the information. If people are not aware of the changes, or their potential
importance for them as individuals, they may not seek out further information.
24. We would like the Government to commit to a significant public information campaign around
implementation, using a wide range of channels to communicate the changes and encourage people to seek out
further information. The Money Advice Service and the Pensions Advisory Service will clearly have an
important role to play in this.
25. At the same time, the opportunity should be taken to highlight the benefits of private saving, using the
state pension statement to give individuals a much clearer idea how much they are likely to need to save on
top in order to achieve the standard of living to which they aspire in retirement.
26. Without this “call to action”, the benefits of the reforms, in terms of providing clearer incentives to save,
are unlikely to be realised in practice.
14 February 2013
Written evidence submitted by Aon Hewitt
SINGLE-TIER STATE PENSION
Summary
1.1 Aon Hewitt is pleased to submit its comments to the Work and Pensions Select Committee. By way of
background, Aon Hewitt is a global company providing human resource consulting and outsourcing solutions
with more than 29,000 professionals in 90 countries.
1.2 The simplicity of the proposed single-tier arrangement is welcomed.
1.3 For the vast majority of individuals, this will make retirement planning significantly easier, and will
hopefully encourage individuals to save more for retirement given the lower reliance on means-testing that
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1.4 As we note below, the proposals could have significantly different implications for certain groups of
individuals. The proposals would also appear to lead to further implications which may not necessarily achieve
the aims set out in the Department for Work and Pensions’ (DWP) White Paper, in particular:
(a) The relatively advantageous position that the proposals would appear to provide to private
sector workers in contracted-out occupational pension arrangements versus other private sector
workers who have always been in their employer’s contracted-in pension arrangements.
(b) The improvements in state benefits that those in contracted-out public sector arrangements are
expected to receive with no compensatory reduction in scheme benefits.
1.5 It is important to note that the test that the new approach “will cost no more than the current overall
system” appears to have been carried out by excluding the significant additional National Insurance
contributions that the Government will receive as a result of ending contracting-out. (See the note to chart 6.1
on page 33 of the Impact Assessment which states that “NICs impacts are excluded”.) The increase in National
Insurance revenues resulting from the proposed changes amount to around £6 billion per annum (see table 6.1
on page 35 of the Impact Assessment). If these additional revenues had been included in the assessment, this
would presumably have shown a material reduction in overall (net) expenditure, which is consistent with a
large number of individuals being worse off as a result of the proposed changes.
1.6 We accept that it may be appropriate to exclude the National Insurance Contributions relating to public
sector employers (around £3.5 billion per annum) from the assessment of whether the new approach will cost
no more than the current system. This is because no reduction to these members’ benefits is proposed to offset
the increase in National Insurance contributions. However, it might be inferred that this approach effectively
meets the costs of retaining public sector pensions at current levels (rather than adjusting these benefits) by
adopting a lower level of future state benefits for the population as a whole than might otherwise be necessary.
1.7 The proposals clearly have cost implications for public sector employers. Government will need to
consider what mechanisms are required to give effect to meeting the cost of these proposals at employer level.
Additionally, Government will need to consider how these proposals sit in relation to the broader agenda for
reform of public service pension provision whereby occupational pensions are subject to a change project
which includes a material element relating to cost reduction.
1.8 In view of the consequences identified at paragraphs 1.4 and 1.5 the DWP may wish to consider
refinements to its proposals. These could include the following alternative suggestions:
(a) the single-tier pension could be increased in level to reflect the National Insurance savings to
be expected;
(b) the single-tier pension provided could include an offset for any notional State Second Pension
rights that were in effect forgone by virtue of having been contracted-out in the past (ie with
the offset being applied at State Pension Age, rather than at implementation). This would
address the potentially advantageous position that some members in contracted-out
arrangements will find themselves in versus contracted-in members, by being able to “replace”
the benefit lost through contracting out by earning additional accrual. This might lead to savings
that could be utilised to further improve the level of state provision;
(c) for those who have been contracted out, rather than set the foundation amount as being the
maximum of the single-tier pension at implementation (including a reduction to reflect
contracting-out) and the pension under the current system (which in most cases would be based
on the current Basic State Pension), set it at the level of the single-tier pension at
implementation (including a reduction to reflect contracting-out). Workers who have been
contracted-out would then need to contribute for longer if they are to reach the full level of the
single tier pension;
(d) alternatively, it may be appropriate that once an individual has built up the full single-tier
pension entitlement, they are granted a National Insurance rebate; and
(e) the Government may wish to reconsider the “Faster Flat Rating” option, of retaining the current
system (including the retention of contracted-out defined benefit (DB) arrangements) but
accelerating the move towards a flat state second pension (albeit with the level set so as to meet
the Government’s aims of controlling long term costs).
1.9 We would note that options 1.8 (b) and 1.8 (c) above would need careful consideration as they may lead
to the state benefits provided to formerly contracted-out members being lower than the Basic State Pension.
Impact on Specific Groups
Women and people with caring responsibilities
2.1 The impact for women and people with caring responsibilities will vary significantly from one individual
to another.
2.2 In respect of women, who on average may earn less than males, the move towards a single-tier pension
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2.3 We would note that:
— Certain younger carers, with significant career headroom, perhaps receiving child benefit in
respect of children under the age of 12 or claiming disability benefits, may potentially receive
a lower state pension under the proposals, versus those they would have been entitled to under
the current system following changes to the State Second Pension made in recent years,
particularly if wage growth is lower than the 4.76% per annum assumed in the Single-Tier
Impact Assessment, or if the triple-lock protection does not average 5% per annum, or if
allowance is made for potential real rises in the state second pension in the longer term once it
has reached a flat benefit. This is because before allowing for future inflationary increases the
£144 per week single tier pension would compare with a full Basic State Pension and State
Second Pension of at least around £190 per week over a full working lifetime assuming the
current system had applied throughout.
— The changes in the state system may lead to improved state benefits (or at least reduce the
chances of means testing) for carers with fewer years to go before State Pension Age. These
carers may have built up relatively little earnings-related state benefits prior to 2002 and may
therefore benefit from the higher foundation amount upon transition to the new system.
Similarly, those caring for children between the age of six and 12 were unable to obtain credit
within the state second pension system until 2010 and so may benefit from the proposals.
— If for any reason a woman or carer were to have less than the minimum qualifying number of
years in the proposed system, their entitlements could be lower than at present. That said,
guarantee credits are likely to significantly affect retirement income for many in this situation.
Self-employed
2.4 The proposals lead to a fairer system in respect of the self-employed who are not currently entitled to
build up any State Second Pension.
Younger/Older cohorts
2.5 Since April 2002, a proportion of State Second Pension accrual has in effect involved a flat tier for any
individual earning over the Lower Earnings Limit (until April 2012 this was through the use of the “deemed
earnings factor”). As a result, for younger workers, the proposals could lead to materially lower state benefits
if earnings growth is not as high as assumed in the Single-Tier Impact Assessment (4.76% per annum) or the
triple lock provisions do not lead to increases in the single-tier pension of 5% per annum, or if allowance is
made for potential real rises in the state second pension in the longer term once it has reached a flat benefit.
This is because before allowing for future inflationary increases the £144 per week single-tier pension would
compare with a full Basic State Pension and State Second Pension of at least around £190 per week over a
full working lifetime.
2.6 The reforms are likely to be more beneficial for the older cohorts, particularly the lower paid, who may
have built up relatively low levels of earnings related state benefits whilst participating in SERPS (State
Earnings-Related Pension Scheme) prior to April 2002, and may now benefit from a higher foundation amount.
Those who will rely on income related benefits
2.7 We have not considered this matter in detail. Removal of Savings Credit may potentially lead to less
incentive for those with low savings to make further provision for their retirement, which could increase the
degree that individuals without a full working lifetime will rely on the guarantee credit. However, this needs
to be balanced with the further simplicity that the system will provide, and the likely level of savings available
for this cohort of individuals. The fact that other benefits contingent on receipt of means tested benefits will
continue for only five years means that there will be workers who do not lose out on overall pension (compared
to the current system and Pension Credit) but still lose out on additional benefits.
Other segments to the population
2.8 The question also invited us to consider other segments of the population, and below we comment on:
(a) the impact on workers in contracted-out private sector arrangements versus workers in
contracted-in private sector arrangements; and
(b) the impact on workers in contracted-out public sector arrangements.
Workers in contracted-out private sector arrangements versus those in contracted-in private sector
arrangements
2.9 Those that have been contracted-out for much of their careers to date, but with a reasonable period
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out (clause 5 and schedule 1). This is because the foundation amount calculated will typically be based on the
individual’s accrued Basic State Pension entitlement, and there will still often be sufficient career headroom to
build up the full single-tier pension before State Pension Age. They will therefore often eventually receive the
same single-tier pension as those in contracted-in private sector arrangements, but will presumably have built
up a higher occupational pension with their employer in the past by virtue of having been contracted-out.
Those that have historically been contracted-out are also far more likely to benefit from the security of a
defined benefit pension arrangement.
Workers in contracted-out public sector arrangements
2.10 We note that public service employers will be unable to pass onto employees the cost of increased
National Insurance from their arrangements being contracted back into the State Pension System. We note the
implications of the changes are therefore:
2.11 A more generous level of overall benefits for public sector workers (because individuals will now be
able to accrue the single-tier pension on top of their existing public sector pension provision) thereby likely
widening the gap with the private sector. We believe that the Government may wish to consider further this
consequence of the changes, and how this fits in relation to the broader agenda for reform of public service
pension provision whereby occupational pensions are subject to a change project which includes a material
element relating to cost reduction. As noted above, we feel it appropriate that the means for financing these
improvements are made clearer, including the mechanisms required to give effect to meeting the additional
cost at employer level.
2.12 In addition, and as noted above for private sector workers, many public sector workers will have
sufficient career headroom to be able to build up a full single-tier pension despite having been contracted-out.
2.13 We set out earlier in our response potential alternatives that the DWP could consider if it wished to
address these points (though the need for mechanisms to meet the additional cost at employer level would
remain).
Proposed Arrangements for Transition
3.1 As noted above, whilst the transitional arrangements (clause 5 and schedule 1) protect accrued benefits
they seem to be particularly beneficial to those in contracted-out pension arrangements who, with sufficient
career headroom, may be able to build up a full single-tier pension to the same level as counterparts in
contracted-in pension arrangements.
3.2 We also note above the impact of ending contracting-out in the public sector.
3.3 The proposals to enable private sector employers to amend DB arrangements without requiring trustee
agreement are welcomed (clause 24 and schedule 13/14). Having reviewed paragraph 2(b) and 2(c) of schedule
14 we believe the words “amount of the scheme’s liabilities” should read “value placed on the scheme’s
liabilities”. Significant care will be required when defining this within regulations, as the amount of reduction
in liabilities due to increased employer National Insurance will significantly vary depending on the assumptions
adopted (including the assumed discount rate). We note that the power to reduce benefits/increase contributions
cannot be used before the implementation date—we would suggest that the power should be available for a
short period before implementation so that employers can choose a convenient time to contract back in and
adjust benefits (paragraph 7 of schedule 14).
3.4 Whilst in itself, ending contracting-out in the private sector might simply lead employers to slightly
reduce accrual rates in DB schemes or increase member contribution rates further, amongst other pressures on
DB pension arrangements at the moment (the effect of low bond yields, changes to pensions taxation planned
from April 2014), the removal of contracting-out is likely to provide a further push towards more radical
reductions in private sector pension benefits in many industries—particularly full closure to DB accrual.
3.5 Further clarity is also required as to how public sector outsourcing contracts in the past will be affected,
and how costs will be absorbed where employers participate as an admitted body. Additional clarity is also
needed around how the changes will affect broadly comparable arrangements that employers have provided in
the past.
Impact of the Changes in the Qualifying Rules for State Pension
4.1 Clause 2(1b) The longer (35 year) qualification period for a full state benefit versus 30 years for the
Basic State Pension is consistent with increases in State Pension Age (SPA) and general expectations that
working careers will become longer (it is not clear whether the intention is to increase this maximum with
future rises in SPA although this would require amendment to primary legislation). As most individuals that
have historically contracted out will have an opportunity to build up additional single-tier pension from 2017,
the conclusion that 80% will be entitled to the full single-tier pension by 2030 seems reasonable.cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01
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4.2 Clause 2(2b) The use of a minimum qualifying period may lead to lower benefits (or greater application
of means testing) for those with no or very low incomes over most of their careers who have not been able to
benefit from NI credits. However, this would appear consistent with the DWP’s aims to provide benefits for
those that have meaningfully contributed towards the system.
Affect on the Future need for Means-tested Pensions Benefits and Incentives to Save for
Retirement
5.1 For many, the adoption of a clear single-tier pension from the State will encourage more individuals to
save more themselves for retirement.
5.2 Compared to the system in place from April 2002 onwards, many modest earners, earning above the
Lower Earnings Limit (who would have been entitled to the Fixed Rate Additional Amount, or the deemed
earnings factor previously), will receive lower state entitlements which could increase their reliance on the
guarantee.
5.3 For those earning less than the Lower Earnings Limit for much of their careers, the removal of the
Savings Credit reduces any incentive to save, however, the level of savings likely to be available for this group
may be limited in any case.
15 February 2013
Written evidence submitted by aquilaheywood
1. Introduction
1.1 We welcome the opportunity to submit evidence to the Work and Pensions Select Committee for its pre-
legislative scrutiny of Part 1 of the Draft Pensions Bill relating to the establishment of a single-tier State
Pension.
1.2 To put our response in context, we have provided the following details about aquilaheywood and our
clients.
1.3 aquilaheywood, the Group comprising aquila and heywood, is the leading supplier of pensions
administration software solutions in the UK. The pension schemes for ten million members in more than 200
major organisations are run using the Group’s administration software solutions. These solutions cover the
whole range of available schemes including defined benefit (DB), defined contribution (DC), hybrid, career
average, cash balance and stakeholder, as well as a full range of other group and individual products including
Group Risk, Individual Protection, (G)SIPPs and Wraps, Income Drawdown and Annuities.
1.4 The Group provides solutions across a diverse range of markets including Financial Services, Third Party
Administration, Corporate and Public Sector pension schemes in the UK, Ireland and the rest of Europe. Its
clients include Aviva, Aegon, Fidelity, Irish Life, Scottish Widows, British Airways, BBC, Asda, BP, Diageo,
the European Central Bank, Aon Hewitt and most local authority schemes. We also provide software and
services in to central government schemes in Scotland and Northern Ireland.
2. Summary
2.1 We understand and identify with the need to reform the current state pensions system and support the
move towards a single-tier state pension that will:
— involve less means testing of benefits for pensioners;
— ensure that individuals who are automatically enrolled into pension schemes fully benefit from
their membership of the scheme and the investment in their future retirement benefits by
themselves and their employer rather than just reducing their entitlement to means tested
benefits; and
— provide a mechanism for defined benefits schemes to cease contracting-out without significant
impacts on benefits and costs to employers and members.
2.2 Given the short timeframe to submit evidence to the Select Committee we have not had the opportunity
to engage with our clients about the impacts of the Draft Pension Bill. We anticipate that other organisations
will comment on the impacts on existing schemes both in the private sector and the public sector.
2.3 We have some concerns that the qualifying period and transitional arrangements will mean that the
objective of ensuring that that individuals who are auto-enrolled into pension schemes fully benefit from their
membership of the scheme will not be satisfied.
2.4 With the restricted time to submit evidence, we have decided to focus on a subject that, in our belief, is
not adequately covered in the Draft Pensions Bill but we believe is imperative for the successful implementation
of the single-tier state pension and that is the issue of the communication of state pension benefits and state
pension ages before, during and after the transition to a single state pension.cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01
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3. Communication
The Need for Communication
3.1 We fully identify with Steve Webb MP’s comments in June 2004 when he was Liberal Democrat Shadow
Work and Pensions Secretary:
“For people to be able to plan for retirement they need reliable, complete and accurate information.
Many have pensions from many different employers, saving schemes and have complex state pension
rights. To plan for a secure old age people need information in one place and simply explained”.1
3.2 Steve Webb MP was commenting on the previous Government’s proposed plans to launch a “web-based
retirement planner” at a cost of £10 million to set up and £5 million a year in running costs. Not surprisingly
this project did not proceed but there is still a need for individuals to have easy access to their accrued and
potential pension rights in an easy and accessible manner.
3.3 In the “old days” it was common knowledge that the state pension age (SPA) was 65 for men and 60
for women and the Basic State Pension was well-published amount. The subsequent equalisation of, and
increase in, SPA together with the introduction of Additional State Pensions (SERPS and S2P) means that
very few people know the state pension benefits that they are entitled to or the date on which the benefits
are available.
3.4 Whilst the Department for Work and Pensions (DWP) have introduced websites that individuals can use
to get state pension forecasts, individuals need to register with the Government Gateway to access Additional
State Pensions or complete forms and wait for details through the post. Neither of these approaches is
“immediate” and easy to access for individuals or their advisors.
3.5 With the introduction of the new single-tier pension, we believe that individuals (and financial advisers)
need easy access to details of their “transitional” state pension amount (with any deduction for contracted-out
periods of service), the extra pension for each year of future qualifying year and the date at which the single-
tier state pension should be payable.
3.6 This information should be available in real time:
— to individuals through a government-provided website, but with less onerous security
procedures than the current Government Gateway—for example with individuals providing
their National Insurance (NI) number and supporting data such as surname and date of birth;
— to individuals through a secure website supplied by their pension scheme that uniquely identifies
the individual’s NI records;
— to pension schemes and pension providers for inclusion in benefit statements; and
— to financial advisors who are authorised by the individual to access state pension data.
3.7 The mechanism for providing the relevant information should be similar to the two-way real time
messaging introduced by HM Revenue and Customs (HMRC) to provide real time information (RTI) about
income payments (including tax and NI contributions) for payroll systems. Indeed the implementation of
payroll RTI should ensure that employees’ National Insurance contributions are up to date at the time the
request for state pension data is requested; thus providing state pensions RTI.
Mandating State Pension Communications?
3.8 The current disclosure regime does not cover all pension scheme members. Members in defined benefit
schemes are not legislatively obliged to receive any form of annual statement. Benefit statements (along with
other scheme information) must only be provided within two months of an individual requesting a statement.
In practice most employers will provide a benefit statement to current employees, although this is not a
statutory requirement.
3.9 The current combined pension forecast arrangements are voluntary and can only be requested by
employers or trustees of pension schemes. In addition this only allows employers/trustees to combine state
pension projections from the DWP with the amount of pension that the employer/trustees is currently projected
to provide. Moreover, the technology underlying the provision of the data for combined pension forecasts is
out-dated and does not provide real time information.
3.10 With access to real time data, consideration should be given to mandating pensions scheme to include
state pension details in benefit statements and/or SMPI (Statutory Money Purchase Illustrations) statements in
a prescribed format.
3.11 Whilst individuals with multiple pension pots will, under the proposed mechanism above, have state
pension benefit details on each of their annual statements, the prescribed format will make it clear that the state
pension benefit is only payable once. Moreover, the proposed introduction of “pot follows member” when
members join new pension schemes should result in individuals having fewer pension pots in future.
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4. Cessation of Contracting-Out and Equalisation of GMPs
4.1 Clause 24 and Schedule 14 allow for private sector employers to reduce pension scheme benefits (or
increase employee contributions) for the cessation of contracting out to the extent that they offset the cost of
additional employer National Insurance contributions. Under the Draft Bill, this can be done without trustee
approval being required.
4.2 The Pensions Act 2007 allowed for the conversion of GMPs (Guaranteed Minimum Pensions) in
occupational pension schemes as long as the cost is neutral to the pension scheme member. This requires that
the post-conversion benefits are actuarially equivalent to the benefits that would have been provided before
the conversion.
4.3 DWP is currently consulting on the equalisation of GMPs. Anecdotal evidence suggests that schemes
will not convert GMPs whilst there is uncertainty about to how GMPs should be equalised.
4.4 We believe that consideration should be given to allow conversion of GMPs and the amendment of
benefits/contributions for the cessation of contracting out (to the extent that they offset the cost of additional
employer National Insurance) and address equalisation issues at the same time. This would also remove the
burden of equalising GMPs as a separate exercise and avoid separate complicated communications to members.
5. In Conclusion
5.1 Whilst we fully endorse the overall approach to the introduction of a new single-tier state pension, we
believe that more attention should be provided to communication aspects. Consideration should be given to
include changes to the Draft Bill to ensure that individuals have a clear understanding of their current and
prospective benefits in the new single-tier state pension and the date from which these benefits are payable.
15 February 2013
Written evidence submitted by Aviva
1. Introduction
1.1 Aviva is one of the world’s largest insurance groups with over 53 million customers worldwide and
45,000 employees. In the UK we manage pensions for over two million people as well as over 5,000 company
pension schemes.
1.2 Aviva is strongly in favour of the proposed simplification of the state pension. Aviva research in 2010
found that two-thirds of the working population view the state pension as a core source of income in retirement,
but two-thirds do not know how much the state pension is. The proposed simplification will provide a clearer
foundation on which all additional retirement savings can be built.
1.3 However it is inevitable that creating a new single tier state pension will mean some people will be
better off in the future under the new system, whereas others would have been better off under the current
rules. While these compromises are necessary, we would like to see them being minimised wherever possible.
There must be broad fairness otherwise we could derail this vital reform and undermine the overall policy goal
of creating a simpler state system which delivers a clearer foundation for additional personal savings.
1.4 The Select Committee’s inquiry will therefore be very helpful in analysing the complexities and fairness
issues now to help the Government addresses any implementation issues and smoothes impacts before the Bill
goes through Parliament.
2. What impact the proposals will have on specific groups, including:
— Women and people with caring responsibilities
— Self-employed people
— Future pensioners who will still rely on income-related benefits in retirement
2.1 Women with a more flexible labour history and carers will benefit from the positive recognition of their
contribution to society, and we welcome the fact that self employed people, who are often lower earners, will
see some redistribution in their favour which means they will no longer be relatively worse off by missing out
on access to the State Second Pension.
2.2 However we note analysis from the Institute for Fiscal Studies2 which finds that the proposals “imply
a cut in pension entitlements for most people in the long run” as since 2002 coverage for the state system has
been almost as broad as the proposed rules, but the annual pension accrual from qualifying activities such as
paid employment, caring, self employment or raising children is higher under the current pension system.
2.3 Despite this, it is hard to make an accurate assessment now of what the current state pension might be
in the future given unknown political, economic and social changes over the next 30 years. Further, this system
is designed to work alongside the growth in private provision under automatic enrolment so the state pension
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payments due under the proposed reforms would for many future pensioners be supplemented by income from
private pension savings.
3. The proposed arrangements for the transition from the current system to the new one, including:
— How accrued rights will be protected
— The effects of ending contracting-out of the State Second Pension.
3.1 There is a need for care and fairness in the transition from the old to the new system—especially in
relation to the treatment of contracted-in and contracted-out savers. While the details are yet to be agreed,
Aviva sees a potential unfairness in the treatment of contracted-in versus contracted-out savers.
3.2 The calculation of the foundation amount, which protects people’s rights under the old system, is broadly
fair. The issue is the future accrual, where contracted our workers will be allowed to build up to £144 per
week again whilst keeping their contracted out benefits, whilst contracted in workers can’t build up additional
entitlements because they don’t face the notional deduction. We examine this in detail below.
3.3 We understand that, when the new system starts, a saver who has been contracted-out for a period of
their working lives will have their foundation state pension adjusted and reduced to take into account their
contracted-out years—ie reduced by the “rebate derived amount”. We understand this individual will then able
to continue building state pension benefits, on top of this calculated foundation, up to the single-tier level of
c £144 per week.
3.4 In comparison, an individual who has been contracted-in throughout their working life will not be subject
to any reduction via the “rebate derived amount”. Once their foundation amount reaches c £144 there is no
scope for continued benefit accrual. (eg the example of Liz in the published single-tier White Paper.)
3.5 The calculation of the “rebate derived amount” will significantly influence the magnitude of this potential
“unfairness”. Aviva does not want this potential issue to derail what is otherwise a positive policy development.
Additional example to highlight different experiences of contracting out
3.6 John is in a money purchase contracted-in scheme when the new system is introduced (say in, 2017) he
will have been working for 33 years of which 28 were contracted-out as he has been a member of a DB scheme
for most of his working life. He will receive a foundation amount which is calculated as (33/35 x 144) minus
a “rebate derived amount”. We don’t yet know the “rebate derived amount”, but as an extra year of NI under
the new pension is worth £4.11 per week so we will use that as an estimated deduction. So, John’s foundation
amount is £135.77 minus £115.08 (ie 28 x £4.11) = £20.69. However, John’s foundation amount can never be
less than John’s state pension entitlement under the old system.
3.7 To make sure John isn’t worse off under the new system there a safety net of his position under the old
system. As John had 30 years NI credits at the date of the change, his foundation amount is the current basic
state pension of £107.45, rather than the £20.69 derived from the new system calculation. As he has also been
contracted out for 28 years, he has SERPS/S2P equivalent (in the form of guaranteed minimum pension, or
GMP, or as section 9 (2B) rights) embedded in his DB benefits, worth say £100 a week.
3.8 Where the problem arises is in the new system. John is then allowed to build up another £37 of state
pension to get to the £144 per week—accruing at a rate of £4.11 for every extra year of NI credit after 2017
this will take nine years. Compare that to Liz and Jenny from the consultation paper, who have never been
contracted-out. They get £144 and £147 respectively and are not allowed to build up any more state pension.
They don’t have any contracted-out equivalent GMP or section 9 (2B) rights to add to these totals.
3.9 John gets £144 from the new system plus £100 state pension equivalent from the old system that is
embedded in his DB pension. Comparing John with Liz and Jenny, the transition looks quite skewed in John’s
favour. Sorting this out should not be too difficult. The consultation and Bill have a way to go before they
become final. We should use that time to iron out as much unfairness as we can.
4. What impact the changes in the qualifying rules for a State Pension are likely to have
5. How the proposals are likely to affect the future need for means tested pensioner benefits and incentives to
save for retirement
4.1 We believe these areas are closely linked. Overall we believe that simpler qualifying rules and a single
state pension payment will together make it much easier for people to understand their own pension situation.
It will be easier for the Government to administer, and people can more readily see what they can expect to
receive in retirement. A simpler flat rate pension should also ensure that those who most benefit from a
minimum income standard will get it—as opposed to the current system, under which DWP figures suggest
about a third of those who should receive them are not currently claiming pensions credit for which they
are eligible
4.2 Aviva research3 found that more than six in ten people in the UK view the state pension as their
primary or secondary means of funding their retirement, but despite this reliance many do not know much
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about the system they will rely on for their financial security in retirement. A clearer system is also a more
effective incentive to save. If people know what they will get from the state, they can more easily see where
their provision may fall short and take steps to make private savings.
4.3 While the proposed single-tier state pension of £144 per week improves accessibility and simplicity, it
still provides a limited replacement income in retirement and so there will be a real need to encourage people
to save privately to supplement this core income. Our analysis has shown that the new state pension combined
with minimum automatic enrolment contributions to a private pension, will only deliver acceptable income
replacement rates for younger lower earners.
4.4 Office for National Statistics4 research shows the average retired household expenditure for those who
mainly depend on the state pension. With nearly a quarter of their income going on housing fuel and power,
this would equate to £33 per week based on an income of £144 per week. Similarly, pensioners would have
about £24 for food—at 17% of income—and £8 for transport, at 6%. The need to supplement the basic state
pension, even at £144 per week, is clear.
4.5 A single-tier state pension combined with greater access to private savings through auto-enrolment
should mean people are more engaged with their retirement planning and able to easily increase their savings
levels. It is much easier to encourage savings behaviour when people know anything they save can add to their
retirement income.
15 February 2013
Written evidence submitted by the British Australian Pensioner Association Inc.
The British Australian Pensioner Association (BAPA) has around 3,000 members who are representative of
over 250,000 British state pensioners living in Australia.
1. The words “simple” or “simplify” are mentioned a number of times in the proposed Bill.
2. This submission seeks to demonstrate that the existing system could be made even more simple and fair
in accordance with the stated aims.
3. This submission primarily seeks to address the issues raised in clause 20 of the proposed Bill.
4. Everyone pays into the National Insurance Fund (NIF) in order to qualify for the state pension under
exactly the same rules.
5. Everyone qualifies for the state pension under exactly the same rules, based on the number of years of
contributions into the NIF.
6. When it comes time to pay annual increases to the state pension, different rules are applied depending on
where you happen to live. This is unfair and more complicated. The countries where the state pension is frozen
has no logical or reasonable basis.
7. Pensioners living in mainly Commonwealth countries are disadvantaged. Although there are several
Commonwealth countries where pensions are uprated either because they are EU members or because there is
a reciprocal agreement in place that includes UK pension uprating.
8. Reciprocal agreements are in place between the UK and Canada, and the UK and New Zealand, but these
for some reason do not include the uprating of UK pensions in those countries. This is despite the fact that
both Canada and New Zealand and even Australia uprate the pensions of their pension recipients residing in
the UK.
9. Australia terminated the Australian UK Social Security Reciprocal Agreement in February 2001 because
it was costing the Australian taxpayer many millions of dollars to top up the pensions of frozen British
pensioners living there under the terms of the agreement. This termination resulted in other adverse effects
because uprating is not the key aim or focus of the Reciprocal Agreement. Australia already uprates the
Australian pensions of its people living in the UK even now without a reciprocal agreement in place.
10. Each year a statutory instrument called The Social Security Benefits Uprating Order is passed by
Parliament. This uprates the British state pensions of all people in receipt of the state pension no matter where
they live in the world.
11. Following that, another statutory instrument called The Social Security Benefits Uprating Regulations is
passed by Parliament which freezes the state pensions of people living in most Commonwealth countries.
12. We suggest that if this latter statutory instrument, the Regulations were not passed, given that the
first Order was passed, that this would lead to a simplification of the state pension system and enable it to
become fairer.
13. Here is a selection of what MPs have said in the past. They were at the time in Opposition.
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14. Previous Liberal Democrat Spokesperson for Work and Pensions, Steve Webb MP said: “All state
retirement pensions in payment to pensioners living outside the United Kingdom shall be subject to annual
uprating by the same percentage rate as is applied to such pensions payable to pensioners living in the United
Kingdom”. He signed an EDM that said: “That this House notes with concern that 520,000 British pensioners
living abroad have their pensions frozen in value and thus not increased when the pensions in the United
Kingdom receive annual increases; believes the practice of freezing these pensions is wholly unfair,
discriminatory and irrational especially when some pensioners living overseas do have their pensions increased
annually; believes that all pensioners living abroad, many of whom have made lifelong mandatory payments
to their state pensions, are deserving of this annual increase; and urges the Government to bring forward
proposals to end the evident unfairness in the current arrangements.”
15. Leader of the Liberal Democrats, Nick Clegg MP said: “I can assure you that Liberal Democrats firmly
believe that pensioners that have paid taxes and contributed towards National Insurance should not be penalised
for choosing to live abroad in retirement”.
16. Previous Liberal Democrat Spokesman for Work and Pensions, David Laws MP said: “Whatever his
view on whether we should uprate pensions for those who move abroad, however, we surely cannot defend
the current situation, in which some are uprated and some are not. He will know that even Ministers have
admitted that the situation cannot be defended on the basis of any logical and rational system.” He also said:
“Uprating arrangements for the pensions of those who live abroad represent an enormous injustice. They are
totally arbitrary and illogical”.
17. Then Labour Secretary of State for Work and Pensions, James Purnell MP said: “Of course, it is not
legally necessary to have a reciprocal arrangement before making such (uprated) payments. Any Government
could do that unilaterally”.
18. Conservative Shadow Minister, Oliver Letwin MP said: “The current situation (of frozen pensions) has
evolved as a product of history, not rationality”.
19. Previous Pensions Minister, Stephen Timms MP said: “Bilateral agreements can be the means of
providing annual increases of retirement pension, but that is not their primary purpose. An agreement is not
strictly necessary to allow payment of pension increases, as that could be achieved through changing UK
domestic legislation.”
20. Social Security Minister, Jeff Rooker MP told the Commons in November 2000: “I am not prepared to
defend the logic of the present situation. It is illogical. There is no consistent pattern. This is a historical issue
and the situation has existed for years.”
21. Conservative Leader, David Cameron, when still in opposition, wrote: “You may know that my Shadow
Pensions Minister Nigel Waterson MP has tabled Parliamentary Questions on this subject. He has also pressed
Government Ministers on the matter during the Commons passage of the Pensions Bill. Government Ministers
have refused to initiate negotiations with those countries with whom we currently have no reciprocal
arrangements but I can assure you that this issue will be considered as part of the Conservatives’ policy
review process.”
22. Labour Shadow Minister Ian McCartney MP in 1993, wrote, and signed, a letter saying: “Labour’s
policy is to ensure equality of treatment to all British pensioners who live abroad in countries outside the
European community.”
23. In that same year, a Liberal Democrat policy paper read: “Pensioners who go to live abroad get no
annual uprating in their pensions at all, unless they live in another EC country or a country with which the UK
has a reciprocal social security agreement. In 1991, 343,000 pensioners lived in ‘frozen rate’ countries (mostly
in Australia, Canada, New Zealand and South Africa). This discrimination is inexcusable. Liberal Democrats
would ensure that non-resident pensioners get the same uprating as resident pensioners”.
24. There are over 550,000 British state pensioners living overseas who have their state pension uprated
every year, just as if they were living in the UK.
25. There are over 550,000 British state pensioners living overseas who have their state pension frozen at
the rate at which it is first paid or as at the date of migration.
26. All of the above state pensioners, both uprated and frozen, have paid into the National Insurance Fund
under exactly the same rules.
27. When a pensioner from a frozen country visits the UK or EU on holiday or for family reasons or any
other reason, the current system allows them to advise the Department for Work and Pensions (DWP) of their
travel plans and received the uprated pension whilst they are temporarily (or ordinarily) resident in the UK or
EU. There have been cases where pensioners have been required to produce copies of airline tickets, travel
itineraries, boarding passes, hotel bills, etc. in order to substantiate their claims. All these records need to be
processed by DWP staff at a cost to the taxpayer. Once they return to their frozen country, their state pension
is returned again to its old frozen pension rate. This is a degree of complexity that would no longer be needed
if all pensions were uprated equally no matter where pensioners live.You can also read
