Does the Pensions White Paper provide a long-term solution?

Despite a reportedly frosty initial reception from some in Government, the Pensions Commission’s report from last autumn has finally borne fruit in the shape of the Pensions White Paper published on 25 May.

The Pensions Commission was an independent body, headed by Lord Turner, set up to review the system of private pensions and long-term savings in the UK. Ultimately, it bravely took on the state system rather than private pension provision and the white paper follows suit.

The basic state pension will once again be linked to the rise in earnings. But the catch is that the link will not be restored until 2012  or thereabouts.

The Thatcher government broke the link between the basic state pension and earnings in 1981. Since then, the basic state pension has been linked to the rise in retail prices index. This has seen the basic state pension fall in real terms from 22.4 per cent of average earnings in 1985-86 to 15.6 per cent in 2005-06.

Coupled with the rise in state pension age, will we just be waiting longer to get a marginally increased pension? It seems likely that there is going to be an element of this in the early days, but over the longer term pensioners will share a bit more fairly in the improving prosperity of the country as a whole. The state pension age is set to rise to 68 by 2046, but this will happen in three stages: the first increase, from 65 to 66, will be phased in over two years starting in 2024, with 68 being reached in the third stage by 2046.

While the prospect of working longer may be unattractive, undeniably people are living longer, meaning a later retiring age makes economic sense. Also, although the changes affect the date on which the state pension is available, if you have an adequate private pension provision and can afford to retire earlier you can do so. There are already some fears though that, for example, manual workers will lose out.

The National Pension Savings Scheme was one of the key recommendations of the Pensions Commission and, as widely anticipated, has been carried forward into the white paper.

It is proposed that the national scheme will be ready for operation in 2012 and membership will be automatic for employees with an option to opt out and a default level of contributions. Under the current proposals, employees would be expected to contribute 4 per cent ‘post-tax pay’, with employers expected to pay 3 per cent of ‘matching compulsory employer contributions’. The state would provide 1 per cent as tax relief.

But will employers level down their existing provision to the National Pension Savings Scheme minimum? And will unscrupulous employers force employees to opt out? Could this also bring small businesses to their knees?
These are all real issues and, no doubt, there will be some casualties because of a one-size-fits-all system, but it is likely that good employers will still want to provide more and small businesses can be helped by a phasing-in period.

The other headline change is what the new system will mean for people with interrupted work records. The Government has rejected the simple test of residency to qualify for the basic state pension proposed by the Pensions Commission and so, as far as I can tell, this will lead to means-tested benefits for some. But, fortuntaely, the number of contributory years an individual will need to pay National Insurance contributions for before qualifying for the full basic state pension will be reduced to 30 years for everyone.

Overall, there are some fairly bold changes proposed and apparently a degree of political consensus that is much needed to try and deal with this long-term problem.