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PENSIONS

Later Life Ambitions Policy Positions

The last ten years have seen hugely significant changes in pension policy and provision. These will make a lasting impression on the UK pensions landscape, and more importantly on the pockets of current and future pensioners. But more needs to be done to make sure that future generations plan for the prosperous and fulfilling retirement that they rightly deserve.

 

The State Pension

The first step is to increase public understanding of state entitlements and communicate a clear message to those approaching retirement. While the recent simplification of the system and the introduction of the New State Pension are to be welcomed, there is some concern that this has created a multi-tiered pensions system, with pensioners being treated differently depending on whether they are eligible for the full New State Pension or not.

Under the old system, pensioners receive a maximum of £122.30 per week, whereas under the new system pensioners will receive £159.55 per week [1]. While this is good news for those who retire after April 2016, the Government needs to ensure that it continues to look out for those on the old scheme, and factors them in to any future policy decisions.

 

The triple-lock

The ‘triple-lock’ on state pensions, which ensures that pensioners are not exposed to wider economic shocks and are able to safeguard their standards of living, must also be protected in the long term.

What is the triple-lock?

The triple-lock is a guarantee to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%. The lock ensures that pensioner income is not eroded by the gradual increase in the costs of living.

The triple-lock was introduced to make up for the many years in which the value of the state pension was eroded, which had left many pensioners struggling to cope with the cost of living. Only now after several years of the triple-lock are many pensioners provided with the means to live financially secure lives as they get older.

Removing the triple-lock risks un-doing all this good work by the Government. It may also cost the Treasury more money in the long run through rises in health and social care costs if pensioners are pushed further back into poverty. This is why we welcome the commitment made in the Conservative DUP deal to retain the triple lock.

However, the triple lock benefits some pensioners more than others because it only applies to selected parts of the State Pension. The basic and new State Pension benefit from the triple lock, but it does not apply to other pensions and pensioner benefits such as the State Second Pension, Earnings Related State Pension, disability benefits, war veterans and widows’ benefits, and carers’ benefits – the uplift on these benefits is only linked to price inflation. So pensioners on the new State Pension receive the triple guarantee, but pensioners on the old two-tier state pension will not receive the higher rate of increases on these extra pension benefits. LLA is calling for a review of this ‘two-tier’ increase system and for the Government to transfer pensioners on the old State Pension to the new State Pension on a no detriment basis.

 

Indexation and uprating

Each year, the Government increases – or ‘uprates’ – the value of social-security benefits (including the State Pension) in line with a measurement of price inflation. Until 2010, this was the Retail Price Index (RPI), and it is now the Consumer Price Index (CPI).

What is the difference between RPI and CPI?

Both the Consumer Prices Index (CPI) and the Retail Prices Index (RPI) measure inflation. Each aim to measure the changes in the cost of buying a ‘basket’ of products, but they cover different items and differences in formulae used to calculate the each rate mean that CPI is often lower than RPI.

RPI is the headline rate of inflation. It is calculated by taking the average price of more than 650 goods and services on which we typically spend our money – including groceries, the price of alcohol served in pubs, petrol and housing costs.

Like RPI, the CPI looks at the prices of items we spend money on, but excludes housing costs and mortgage interest payments. And unlike RPI, CPI is calculated on a formula that takes into account that when prices rise, some people will switch to lower priced alternatives.

However, at a time of low wage growth and high housing costs there have been concerns that CPI does not accurately reflect households’ experience of price changes. It also cannot be overlooked that CPI typically returns a lower inflation reading than RPI.

Our view is that any price index used for uprating purposes must reflect, as far as possible, the actual experience of households and the pressures on their budgets. This is why LLA favours the development of a Household Inflation Index (HII) to better reflect the inflation experiences of households.

Ultimately though, LLA believes the Government should accept the expert views of the UK statistical authority on the best inflation measurement to use.

 

Equalisation of the State Pension Age

In 1940 the State Pension Age was set at 60 for women and 65 for men. In 1995 the then Conservative Government took the decision to equalise the state pension age for men and women.  The timetable set out in the Pensions Act 1995 stated that pension equalisation would happen progressively between 2010 and 2020. At the time, women were told that from April 2020 any women born in April 1955 or later would get their state pension at 65. In 2007 the then Labour Government announced that the State Pension Age for both men and women would rise to 66 between April 2024 and April 2026.

In 2011 the Chancellor of the Exchequer, George Osborne announced that the rise in state pension to 65 for women would happen between 2016 and 2018, equalising two years earlier than planned. He also announced that the pension age for both sexes will rise to 66 by 2020. This did not provide adequate warning for those affected.

Whilst we understand the reasons behind the equalisation of the State Pension Age, women in their fifties and early sixties will be unfairly disadvantaged with some seeing their State Pension Age rise by eighteen months with less than two years warning. They will experience a considerable impact on their retirement income and plans.

We urge the Government to introduce proper transitional arrangements so that the State Pension Age does not fully equalise until 2020 as promised. We are calling on the Department for Work and Pensions to send out more targeted communications to women likely to be affected by these changes which should explain clearly what steps women can take to mitigate this such as making Voluntary National Insurance contributions.

 

Private pensions

Three quarters of people born in the 1950s and two thirds of people born in the 1960s have a private or occupational pension. However, that figure drops to less than half for today’s under 30s. 43% of young people aged 20 to 29 have no savings at all other than through their state pension. There are many reasons for this decline, including the rapid retreat of employer schemes, student debt, high property prices and poorly paid graduate jobs. The current pension settlement is a poor deal for young people, particularly given closures of good final salary schemes.

In 1997, Defined Benefit pension schemes (known as ‘final salary’ plans), which typically offer more generous retirement incomes than alternative Defined Contribution schemes, made up nearly three-quarters of all private sector pensions but by 2011 this figure had fallen to less than a third.

We have welcomed the introduction of auto-enrolment but the incoming Government needs to go further to make savings count and encourage younger people to make provisions for their future. This means action to reduce the further closures of Defined Benefit schemes and a commitment to explore ‘shared risk’ alternatives such as Defined Ambition schemes.

We look forward to reviewing the outcome of the Government’s Green Paper on Defined Benefit Pensions. It is crucial that the Government’s response to the consultation includes policies to improve confidence in occupational pensions and protects the interests of pensioners who have invested in these schemes.  We also support any attempts made to improve the enforcement powers of The Pensions Regulator who must intervene, earlier and better, to enforce legally-binding requirements and support pensioner representation as Trustees of pension schemes.

 

Auto-enrolment and NEST

Currently, millions of people are not saving enough to have the income they are likely to want in retirement. Life expectancy in the UK is increasing and at the same time people are putting less into their pensions. Under the Pensions Act 2008, every employer in the UK must now put certain staff into a pension scheme and contribute towards it. This is called ‘automatic enrolment’. Between 2012 and 2018, up to 11 million workers will be automatically enrolled into a workplace pension. To facilitate this the Government established the National Employment Savings Trust (NEST), a low-cost defined contribution workplace pension scheme which has an obligation to accept any employer who wants to use it for their employees.

We support the introduction and roll-out of automatic enrolment, which will help to encourage a retirement savings culture in the UK. Auto-enrolment makes joining a workplace pension scheme easier, and makes saving into a pension more financially attractive by making it compulsory for employers to pay into eligible workers’ pension schemes.

However, we would like to see further steps taken to improve contribution and benefit levels. For example, any increases in salary should result in an automatic increase in pension contributions from both the employer and individual.

[1] Figures from April 2017. The higher state pension is only available if a person has enough contributions. Sadly, the majority of those who were in ‘contracted out’ schemes will not have enough contributions to qualify for a higher state pension.

 

Contact

If you would like any more information about the LLA policy positions, please contact Tristan Westgate at laterlife@connectpa.co.uk or call him on 020 7592 9592.

LLA is calling for

  • Maintenance of the state pension ‘triple-lock’
  • A review of the ‘two-tier’ system and for the Government to transfer existing pensioners to the new state pension on a no detriment basis
  • Development of a Household Inflation Index (HII) to better reflect the inflation experiences of households
  • Proper transitional arrangements so that the State Pension Age does not fully equalise until 2020 and targeted communications to those women affected by the miscommunication of changes in the 2011 Pensions Act
  • Measures to improve confidence in pensions savings and support for Defined Benefit schemes, including improved enforcement powers for The Pensions Regulator
  • Increase in the minimum employer contributions for schemes under automatic enrolment, which will help to encourage a retirement savings culture in the UK, with greater involvement of NEST and more consolidation of schemes
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