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The Government has published its White Paper on Pensions Reform, entitled "Security in retirement: towards a new pensions system". The recommendations of the Pensions Commission have been accepted in principle but the Government intends to consult further on the implementation of the proposals.
The White Paper contains measures that, over a forty-year period, will address the pensions funding issues caused by the increase in longevity. In 1950, the proportion of people over retirement age was 19% of the working population. It is currently 27% and is expected to increase to 47% by 2050.
Since the 1970s, employers have been discontinuing their provision of occupational pensions as a result of higher costs caused by the rapid increase in life expectancy and the falls in investment income By 2004, there were now two million fewer members of open private sector occupational pension schemes than there were in 2000. This reduction has been accompanied by a shift from defined benefit (salary-related) schemes to defined contribution (money purchase) schemes.
The Government remains convinced that the workplace is the best environment for the delivery of private pensions. Over 2.7 million stakeholder pensions have been sold since their introduction in 2001 but they have only demonstrated that, unprompted, people often do not take the decision to start saving for a pension and that, as people move jobs, there is little continuity in saving.
The Government's approach to tackling these problems is to design the reforms around five principles, namely that the reformed pensions scheme must
- promote personal responsibility, by tackling the problem of undersaving for retirement
- be fair, by protecting the poorest, and being fair to women and carers, to savers, and between generations
- be simple, by clarifying the respective roles of the State, the employer and the individual
- be affordable, by maintaining macroeconomic stability and striking the right balance for provision between the State, the employer and the individual, and
- be sustainable, by setting the basis of an enduring national consensus, while being flexible to future trends.
Based on the recommendations of the Pensions Commission, the Government intends to make two major reforms.
- Introduce low-cost personal accounts to give those without access to occupational pension schemes the opportunity to save. People will be automatically enrolled into either their employer's scheme or a new personal account, with the freedom to opt out. Employers will make minimum matching contributions.
- Reform the state pension system by uprating both the guarantee element of Pension Credit and the basic State Pension in line with earnings growth, rather than prices. Make the State Pension fairer and more widely available and raise the State Pension age in line with increasing longevity.
The reform measures are to be introduced over nearly forty years.
From 2010, the State Pension will be made more widely available by:
- reducing the number of years needed to qualify for the full pension to 30
- replacing Home Responsibilities Protection with a new weekly credit for those caring for children
- introducing a new contributory credit for those caring for severely disabled people for 20 hours or more per week
- abolishing the initial contribution conditions to the basic State Pension, so that caring for children or the severely disabled will build entitlement to the basic State Pension, without having to make a minimum level of contributions; and
- making a number of other simplifications to the rules for entitlement to the basic and State Second Pensions, and abolishing a number of complicated and out-dated provisions such as adult dependency increases and autocredits.
Between 2010 and 2020, the State Pension age for women is already due to rise from 60 to 65, to equalise with the State Pension age for men. From 2024, the State Pension age will increase from 65 to 66 over a two-year period, with further increases to 67 over a two-year period starting in 2034, and to 68 over a two-year period starting in 2044.
In 2012, a new scheme of personal accounts will be introduced, with the following key features:
- Employees will contribute 4% of a band of earnings of between around £;5,000 and £;33,000 a year.
- Employers will make minimum matching contributions of 3% on the same band of earnings.
- Employees' contributions will benefit from tax relief at their marginal rate and employers' contributions will be exempt from both tax and NICs.
- There will be support for all employers during the introduction of compulsory employer contributions:
- their contributions will be phased in over a three-year period, at the rate of 1% each year
- the contribution rate will be set out in primary legislation to create stability
- the priority will be to design the scheme and the transition phase so that burdens on employers are minimised, and
- the Government will consult on transitional support for the smallest businesses and whether a longer phasing period is needed.
- Automatic enrolment for employees into either the new personal accounts scheme or their own employer's occupational scheme providing it meets a minimum standard. Employees will be able to opt out of this provision, in which case the employer would not contribute.
In 2012, or before the end of the next Parliament, the basic State Pension will again be linked to average earnings. At the same time,
- the State Second Pension will be reformed so that, over the period to 2030, it will gradually become a flat-rate weekly top-up to the basic State Pensio
- contracting-out of the State Second Pension will end for defined contribution pension schemes.
The key outcomes of the reforms are expected to be:
- everyone will be able to enrol into a new, low-cost personal account
- automatic enrolment ensures that employees will be saving for a pension unless they actively decide not to do so
- up to 10 million people could be saving in a personal account
- by retirement, their pension funds could be worth up to around 25% more because of lower charges
- in 2010, 70% of women reaching State Pension age will be entitled to a full basic State Pension, compared to 30% now
- by 2025, over 90% of women and men reaching State Pension age will be entitled to the full basic State Pension - compared to about 80% without reform
- by 2050, the basic State Pension could be worth twice as much as if it had been linked to prices
- anyone who has been in employment or caring throughout their working life could receive £;135 a week at retirement in state pensions - which is £;20 a week above the.
- guaranteed income level
- fewer pensioners - down to around a third by 2050 - could be entitled to Pension Credit.
...back to 1 June 2006
Source:
Security in retirement - Executive Summary
Security in retirement - full document
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